Oil investing is unlikely to return to its brighter days any time soon. Refusal to cut production by the OPEC and the U.S. amid falling demand has dulled oil investing for over eight months. And now, president Obama's new fracking rules have rubbed salts to the wound (read: Short Oil ETFs in Focus as Crude Prices Keep Falling).
In a bid to be more environmentally friendly, the White House apparently unleashed some benchmarks for oil companies’ fracking on federal lands on March 20. The new set of standards on hydraulic fracturing has been proposed for the first time in 30 years.
According to the Bureau of Land Management, the new standards require oil and gas drillers operating on federal lands to reveal the chemicals used in fracking. The companies will also have to endure tougher measures in both constructing wells and disposing waste water afterward.
Hydraulic fracturing, commonly known as fracking, is a process by which water, sand and chemicals are pimped into a well for extraction of oil or gas. However this process – which poses hazards to health – is highly debated by environmentalists. Energy companies already suffering from losses due to low oil prices were obviously against these rules.
Market Impact
Investors should note that these rules hold good only for wells operating on federal and Indian land which accounts only for 11% of gas drilling and 5% of oil drilling in the U.S. Probably thanks to such meager exposure, energy ETFs were still not hugely hurt following the announcement, though these were down on Monday trading.
In fact, the U.S. states could regulate fracking taking cues from the set standards since they administer a large portion of the country’s fracking. This points to another dark cloud over the energy space due as Obama sets new rules. Notably, while energy players are agitated by this interference, environmentalists believed that the regulations are smaller in size.
While many energy ETFs could be losers in the days ahead, a pure-play on the unconventional energy world – MarketVectors Unconv. Oil & Gas (NYSE:FRAK) – is surely an energy ETF to keep an eye on for the future (see all energy ETFs here).
FRAK in Detail
This ETF provides exposure to the unconventional oil and gas segment, which includes coal bed methane, coal seam gas, shale oil & gas, and the sands market. This fund follows the Market Vectors Global Unconventional Oil & Gas Index, holding 68 stocks in the basket. Volume and AUM are quite low for this large cap focused fund while the expense ratio is 0.54% (read: 2015 Outlook for Oil & Gas ETFs).
The top three components include Anadarko Petroleum Corp (NYSE:APC), Occidental Petroleum Corporation (NYSE:OXY) and EOG Resources Inc (NYSE:EOG) with a combined share of nearly 23% of total assets. Exploration & production takes the top spot in terms of sector exposure, while oil & gas integrated contribute decently as well.
The ETF has lost 4% in the year-to-date time frame (as of March 23, 2015) and has a Zacks ETF Rank of 5 (Strong Sell) with a High risk outlook.
Other ETFs to Suffer
As per Investors Business Daily, Exxon Mobil (NYSE:XOM), Continental Resources Inc (NYSE:CLR) and Sanchez Energy Corporation (NYSE:SN) are some of the energy companies vulnerable to the new rules. So ETFs like Vanguard Energy (NYSE:VDE), iShares DJ US Energy Sector Fund (NYSE:IYE) and Fidelity MSCI Energy Index (NYSE:FENY) might come under pressure as XOM takes more than 20% exposure in each of these.
Sanchez Energy presently holds about 2% in SPDR S&P Oil &Gas Explor & Product (NYSE:XOP). As of March 23, 2015, VDE, IYE, FENY and XOP were down about 0.2%, 0.3%, 0.2% and 1.22%, respectively.