ETF of the month: iShares Oil & Gas Exploration & Production

This issue’s ETF of the month is BlackRock’s oil and gas exploration ETF which has carried on from the strong performance it delivered in 2021

Jamie Gordon

Oil rigs and charts

Exposed to an industry that has enjoyed a dramatic comeback from COVID-19 volatility, this sector play has captured the imagination of investors in an environment of hawkish monetary policy, the iShares Oil & Gas Exploration & Production UCITS ETF (SPOG).

It is worth noting the prospects of brown energy were diminishing long before the pandemic arrived amid the rise of cleaner alternatives, increasing scrutiny by investors and the public, carbon emissions as an operational cost as well as fines and reparations such as BP’s $65bn total bill for the Deepwater Horizon spill.

Then, much to the delight of greener-minded investors, the first round of lockdowns saw oil prices flash as low as $-40 a barrel in May 2020 as markets panicked at the sudden brick wall facing travel and industrial output.

This freefall was reflected in the price of SPOG which plunged 65.5% for the year, as at 18 March 2020, and 74.4% from its all-time high in June 2014.

What has transpired since is nothing short of remarkable. Between on-and-off lockdowns, economic reopening and the recent Russia-Ukraine tensions, SPOG surged 298.8% between its March 2020 low and a recent high on 11 February 2020.

In fact, between the start of the year and 11 February, the ETF added 21.4%, with this falling to a hardly shoddy gain of 17.2% by 15 February.

With 2020 acting as the cherry on top of a thoroughly challenging decade for the energy sector, fossil fuel commodities and the companies producing them have been a defining feature of the (rare) bright spell for cyclical stocks in 2021 and the start of this year.

Even as politicians and scientists convened at the COP26 climate summit to pledge their commitment to cleaner consumption last November, western leaders were appealing to OPEC+ members to increase their output amid stretched supply chains and soaring inflation.

More recently, as more than 100,000 Russian military personnel approached the Ukrainian border, the price of Brent Crude flirted within $5 of the significant $100 per barrel mark while European natural gas contracts for next-month delivery surged 12% in a day on Monday 14 February.

After cooling off somewhat the following day, continued demand exceeding Internal Energy Agency (IEA) predictions saw the price of dated Brent Crude – the price of cargoes bought and sold in the North Sea – shoot to $100.80 a barrel on Wednesday 16 February, according to data from S&P Platts.

Meanwhile, in the futures market, the six month timespread in Brent Crude reached as much as $8.74 on the same day, the highest since 2007, according to Bloomberg.

How long these price levels can be sustained – and whether they might increase further still – are discussions investors will need to have.

At present, however, SPOG may still appear reasonable to many. The 63 constituents of the S&P Commodity Producers Global Oil and Gas Exploration & Production index it replicates have an average projected price-to-earnings (P/E) ratio of 11.3.

Also, on 31 January this year, SPOG’s price was down 20% from where it was 10 years ago, though more than 33% above where it began in 2020.

Investors, at least, seem to think the ETF has decent prospects versus other areas of the market.

SPOG attracted only $5.8m inflows, cumulatively, over the past five years, as at 14 February, according to data from ETFLogic.

However, its assets under management (AUM) were boosted to $352m by $81m of new money between the turn of the year and 14 February – showing investors believe the fossil fuel trade may still have gas in the tank.

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

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