Oil Prices Hurt Energy ETFs - TheStreet

Oil Prices Hurt Energy ETFs

The price of oil -- and not the drop in BP's stock price -- has played a more important factor in falling oil service ETF prices.
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NEW YORK (TheStreet) -- While BP (BP) - Get Report and other companies involved in the Deepwater Horizon have seen their share prices collapse, up until this week, the underperformance of oil service ETFs had more to do will falling oil prices.

Therefore, while these ETFs could rebound if energy prices rally, they do not appear to have oversold on the BP fiasco.

The chart below shows the price ratio of BP to

PowerShares DB Crude Oil

(DBO) - Get Report

. Shares of BP plunged following the news of the oil leak, but then rebounded relative to oil and traded along with the commodity until the past week, when shares again plunged on news that the efforts to plug the leaking well had failed.

A look at the

iShares Dow Jones U.S. Oil Equipment Index

(IEZ) - Get Report

relative to DBO shows that the fund recovered all of its losses relative to DBO. In other words, from the end of April until the last week of May, the oil service sector ETFs basically traded along with the price of oil.

Investors may want to reach for the falling knives of BP,

Transocean

(RIG) - Get Report

,

Anadarko Petroleum

(APC) - Get Report

and

Halliburton

(HAL) - Get Report

as rebound plays, but the energy ETFs do not look that undervalued based on the losses in crude oil. There exposure is limited and except for oil service ETFs, they haven't done any worse than the crude oil ETFs.

From the April 20 explosion on the Deepwater Horizon until June 2, DBO fell 14%.

iShares Dow Jones U.S. Oil & Gas Exploration & Production

(IEO) - Get Report

lost 10% over that period,

Energy Select SPDR

(XLE) - Get Report

fell 13% and IEZ lost 20%, as did

SPDR S&P Oil & Gas Equipment & Services

(XES) - Get Report

. Over that same period, HAL is down about 30%, BP and APC are both down about 40%, and RIG is down almost 50%.

While the companies directly involved could be in for quite a bounce if the situation in the Gulf improves, IEZ's underperformance has been much smaller, even with HAL as the No. 2 two holding and 9% of assets. XES has less than 4% each in HAL and

Cameron International

(CAM)

, another firm associated with the disaster.

Meanwhile, despite APC still making up 5% of assets as the number six holding in IEO (it fell from number two and nearly 8% of assets at the end of the first quarter, the ETF outperformed the group thanks to strength from natural gas prices that supported many holdings in the fund.

Looking ahead, IEZ and XES could certainly outperform if the situation in the Gulf reverses, but most of the energy sector has done poorly due to falling energy prices. If we see oil prices rebound, the entire sector is due for a nice rally, but the risk is that an ETF such as IEZ gets held back by continued company specific problems related to the leak in the Gulf. These ETFs haven't declined enough to where I'd say the reward outweighs the risk.

In sum, while the oil leak in the Gulf has not been contained, the losses related to the accident have been mostly contained in the companies directly involved, along with deepwater drillers. For those who do want to play a Gulf-related rebound, it makes more sense to play the individual stocks. Fellow RealMoney contributor Dan Dicker lays out which stocks should be avoided, and which may be good plays, in

Should You Be Drilling for Value?

Investors looking for an ETF rebound play based on a recovery in energy prices would do best with XLE or perhaps

First Trust ISE Revere Natural Gas

(FCG) - Get Report

, as natural gas prices seem to be forming a bottom.

Natural gas also has the advantage of being more environmentally friendly, perhaps giving it a political edge: Obama mentioned the fuel specifically Wednesday as part of his vision for a "clean energy future."

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was not long any equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.