Quick Logic for Buying Engineering & Construction, Energy Services ETFs

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Includes: FLM, PKB, PXJ
by: Johnny Discount

In the past few weeks I have seen many rational arguments supporting the case for higher oil prices, and thus, my reasoning for buying companies with exposure associated with exploration, extraction and construction of energy related services. By 2010, I would expect substantially higher oil prices making a strong case for buying Engineering & Construction as well as Energy Infrastructure companies now.

Rather than pick individual companies, I believe select ETFs will take out the guesswork and provide the exposure I am looking for.

Here is some of my rationale for my expectations:
  • Oil fields are experiencing decline rates in conjunction with decreasing capital and exploratory spending
  • Lower oil prices makes many projects once viable at $80+ oil, no longer profitable, thus reducing potential sources
  • Oil supply will likely be reduced as available credit to build new projects to increase capacity becomes harder to find
  • In an effort to firm up prices and lower current inventories, OPEC will continue to cut supplies
  • Analysts have claimed OPEC countries are potentially producing less than quotas
  • Many non-OPEC countries shunned more professional and efficient private partners when oil prices were much higher. The non-OPEC countries lack efficiency with much lower oil prices and thus, lower margins seems like a downward spiral to their production
  • Russia has been responsible for a large portion of non-OPEC production. Knowing Russia's strong arm tactics and experiences with natural gas, I would think they favor market disruptions
  • While a strengthening dollar could put downward pressure on oil prices, I personally don't see that as a likely scenario
  • Many of the E&C and oil service companies still have very large backlogs
  • The U.S. has the largest demand for oil. Given we were first into a recession, and likely first out, domestic demand in the U.S. could pick up sooner than later and drive prices higher.

The ETFs I find most fitting to these points are the following:

PXJ- PowerShares Dynamic Oil & Gas Services Portfolio

Factsheet: http://www.invescopowershares.com/pdf/P-PXJ-PC-1.pdf

PKB- PowerShares Dynamic Building & Construction Portfolio

Factsheet: http://www.invescopowershares.com/pdf/P-PKB-PC-1.pdf

or

FLM- First Trust ISE Global Engineering and Construction Index Fund

Factsheet: http://www.ftportfolios.com/common/etf/productinfo/FLM/FLM-factsheet.pdf

Disclosure: Author has positions in PXJ and PKB