XOP: Oil Turns Quiet, E&P Stocks Remain A Bargain (NYSEARCA:XOP)

Oil prices have wavered recently. Tensions in the Middle East, for now, have ebbed, resulting in a pullback in what had been a strong rally year to date in WTI. Now under the $80 per barrel level, there is not much action in the oil space.

What has been stealthily on the rise, however, is the price of natural gas. Henry Hub is now above $2 per MMBtu, a significant jump from low levels hit just after the peak of winter demand in February. There are mixed commodity trends for producers of oil and gas.

Still, I reiterate a buy rating on the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP). I see the fund as sporting a low valuation, with many of its largest positions generating robust free cash flow along with a high dividend yield.

Oil Falling, But Natural Gas Rebounding Into the Summer

According to the issuer, XOP seeks to provide exposure to the oil and gas exploration and production segment of the S&P total market index, which comprises the following sub-industries: Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing. The fund’s modified equal-weighted approach provides the potential for unconcentrated industry exposure across large, mid, and small-cap stocks.

XOP’s assets under management are little changed from when I last reviewed the fund in October 2023, currently near $3.7 billion. The ETF features a trailing 12-month dividend yield of 2.26% – about 0.8 percentage points above that of the S&P 500. With a moderate 0.35% annual expense ratio, XOP is often used by investors as a tactical play on outperformance among E&P energy names. Share-price momentum has been steady in the past 12 months, but I will note key price levels on the chart later in the article.

But both traders and investors should be mindful that the ETF often sports a high annual standard deviation, leading to a weak ETF Risk Grade by Seeking Alpha. Its concentrated allocation is another potential risk, particularly during earnings season. Liquidity is strong, however, with volume above 3 million shares daily and a median 30-day bid/ask spread of just a single basis point, as of May 3, 2024.

The fund has undergone interesting portfolio shifts. The 2-star, Silver-rated ETF by Morningstar now plots much more on the value side of the style box, with just 2% in growth. Last fall, about one-third of XOP was considered blend, with 10% in growth. Its valuation has also inched up to above 10x in terms of XOP’s price-to-earnings ratio, but that remains paltry considering its long-term EPS growth rate of 9%.

XOP: Portfolio and Factor Profiles

XOP holds just 55 stocks, so there is some diversification concern and the obvious concentration into a single industry. However, no individual position is more than 3.1% of the ETF. What’s more, with three straight years of dividend growth, cash flow appears to finally be returning to shareholders.

XOP: Holdings & Dividend Information

Seasonally, XOP tends to do well in April. And we saw that last month when the ETF jumped 9% on a total return basis, sharply outperforming the S&P 500, which fell a few percentage points. Now through the end of the year has historically been tough for the XOP bulls, though, so seasonality is a headwind here.

XOP: Weak Seasonal Tendencies Through Q4

The Technical Take

With a low valuation, a somewhat concentrated portfolio, and unfriendly seasonal factors, XOP’s technical situation is lukewarm at best. Notice in the chart below that resistance is in play, now in the low $160s. I was hopeful that once the ETF broke through the $155 mark, then it would be off to the races and a quick test of the 2022 high near $170, but that did not come to fruition.

Still, a broad uptrend is intact in my view. First, the long-term 200-day moving average is positively sloped while XOP is merely working off extremely overbought conditions, as seen in the RSI momentum oscillator at the top of the chart, from early in April. What’s more, there is now an ample amount of volume by price down to about $130, so that should offer some cushion if we see an oil selloff and pressure on cyclical E&P equities.

Overall, XOP is an uptrend, but the fund has not broken out with much vigor despite bouts of outperformance in 2024.

XOP: Rising 200dma, Uptrend But Key Resistance In Play

The Bottom Line

I reiterate a buy rating on XOP. Trading just 10 times earnings and with a decent chart pattern, I see further upside this year.