Broadly speaking, energy stocks and the corresponding ETFs have performed well through the first two months of 2013.
As just one example, the Energy Select Sector SPDR (NYSEARCA:XLE), the largest energy ETF by assets, is up nine percent to start the year.
More upside for the sector could still be in store as U.S. integrated oil names currently sport attractive valuations, strong balance sheets and solid cash flow.
U.S. oil companies are also benefiting North American oil growth, according to S&P Capital IQ, prompting the research firm to have a positive fundamental outlook on the oil and gas sub-sector for the next 12 months.
"This also reflects our strong long-term outlook for energy demand and the growing importance of North American oil production," said S&P Capital IQ in a research note. "We think the integrateds exhibit low debt levels, strong cash positions, superior earnings, cash flow and dividend quality, and attractive valuations."
The research firm also notes major integrateds are beginning to benefit major deep water investments and non-conventional sources, such as shale formations.
"Many large supermajor oils are now highlighting onshore North America assets to convey future growth stories," the firm said in the note.
Among integrated oil names, S&P Capital IQ has five-star ratings on Dow components Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), the two largest U.S. oil companies. S&P has a four-star rating on Occidental Petroleum (NYSE:OXY), the fourth-largest U.S. oil company.
Exxon and Chevron combine for over 32 percent of the Energy Select Sector SPDR, which S&P Capital IQ has an Overweight rating on. Occidental is XLE's fourth-largest holding with a weight of nearly 3.8 percent. Overall, XLE is home to 45 stocks. The ETF has over $7.4 billion in assets under management and an expense ratio of 0.18 percent.
S&P also holds a favorable outlook on select independent exploration and production companies, with a preference for the large-cap names in that group.
"S&P Capital IQ Equity Research also maintains a positive fundamental outlook on the independent oil and gas exploration & production (E&P) sub-industry, but remains more heavily weighted toward the large-cap companies with oil exposure," the research firm said. "We believe these companies carry less risk on their balance sheets and exhibit more conservative spending habits than smaller peers, where funding could become an issue as U.S. natural gas prices remain depressed."
ConocoPhillips, Anadarko and EOG are top-10 holdings in the iShares Dow Jones U.S. Energy Sector Index Fund (NYSEARCA:IYE), which S&P also rates Overweight. IYE, which also allocates over 28 percent of its combined weight to Exxon and Chevron, is up 8.6 percent year-to-date. Those three stocks are also top-10 holdings in XLE. Apache is found in both ETFs as well, though further down the roster.
Another ETF for investors that want exploration and production exposure to consider is the smaller iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (NYSEARCA:IEO). That ETF was not highlighted in the S&P note, but Occidental, Anadarko, EOG and Apache are four of IEO's top-five holdings.
In fact, those stocks combine for over 34 percent of IEO's weight. The $324.1 million ETF is up 11 percent year-to-date.
For more on ETFs, click here.
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