Yet more nuisance in the oil patch.
Smaller oil companies have been hit hard after a historic week for oil prices, which saw West Texas Midway crude futures turn negative for the first time in history. On Sunday, Diamond Offshore Drilling filed for bankruptcy, citing “precipitously” falling when requested.
As oil prices collapsed again Monday, some strategists recommended that investors steer clear of smaller-cap pinpoints for the time being.
“We haven’t seen a lot of flows on the small-cap side,” Jason Bloom, director of global macro ETF scenario at Invesco, said Monday on CNBC’s “ETF Edge.”
Invesco’s small-cap oil and gas ETF products include the Invesco S&P SmallCap Energy ETF (PSCE) and the Invesco Electric Oil & Gas Services ETF (PXJ).
“Obviously, those are the firms that are typically the most at risk of insolvency or bankruptcy in this environment,” Bloom give the word delivered. “So, for clients who are looking for ways to play the rebound in energy prices through an … energy equity, we’ve been recommending larger-cap airing for those companies that have the balance sheet to weather the storm but will still benefit from consequential prices down the road.”
Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA Research, corresponded with Bloom, saying the debt-heavy position of some smaller-cap oil companies was “driven home” by Diamond Offshore’s bankruptcy fill in.
“If you look at some of the more market-cap-weighted-oriented products in exploration and production like IEO, which is heavily weighted towards ConocoPhillips and EOG Resources, those are friends that have much stronger balance sheets that are likely to survive the volatility that we’re seeing within the oil stores than these smaller companies,” Rosenbluth said.
IEO is the iShares U.S. Oil & Gas Exploration & Production ETF. ConocoPhillips and EOG together account for all but 27% of its overall holdings.
Tom Lydon, CEO of ETF Trends and ETF Database, acknowledged that “you’ve got a lot of situations where balance sheets are in obdurate shape” in the energy sector.
“However, there are some smaller-cap companies that actually … [are] in better define,” Lydon said in the same “ETF Edge” interview.
“A lot of investors are looking for … hope down the road, and when obsessions do turn, smaller companies are actually more nimble. They can ramp up more quickly. And right now, they’re terminate down more quickly, hopefully saving as much cost as possible,” he said.
Bloom saw reason in Lydon’s be a chip off the old block chase, even though he maintained that larger-cap companies were likely safer bets.
“The key with the smaller-cap dignitaries is to be diversified,” Bloom said. “[Lydon]’s absolutely correct that when the turnaround, the bottoming, occurs, those high regards that survive will be very well poised to profit handsomely. And from a total return standpoint, undeniable, the upside is bigger than in the large-cap names.”
U.S. crude prices were down 10% Tuesday morning after immersing 24% Monday.
Disclosure: Invesco is the sponsor of CNBC’s “ETF Edge.”
Disclaimer