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Oil & Gas Production: Is There More Energy in This Trade?

XChange NewsletterMay 22, 2023
candlestick chart layered over an image of an electricity pylon

Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don't have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.

The energy sector has been one of the most volatile and underperforming sectors in the past year, as the COVID-19 pandemic and the OPEC+ price war caused a historic collapse in oil demand and prices. However, not all segments of the sector have been equally affected. In fact, some have shown remarkable resilience and recovery potential, especially the oil and gas exploration and production (E&P) industry.

The E&P industry consists of companies that are involved in finding and extracting oil and natural gas from underground reservoirs. These companies are typically more sensitive to changes in oil prices than other energy subsectors, such as refining or transportation, because their revenues depend largely on the volume and value of the commodities they produce.

Here are some of the key drivers that have supported the E&P industry’s recovery and growth prospects:

  • Rising oil prices: The main catalyst for the E&P industry’s rebound has been the recovery in oil prices, which have surged from a negative territory in April 2020 to above $70 per barrel in May 2023. The rally in oil prices was driven by several factors, such as the gradual reopening of the global economy, the vaccine rollout, the stimulus measures, the OPEC+ production cuts, and the supply disruptions in some regions. Higher oil prices have boosted the profitability and cash flow of E&P companies, as well as their ability to invest in new projects and pay down debt.
  • Cost discipline and operational efficiency: Another factor that has enhanced the E&P industry’s performance is the improved cost structure and operational efficiency of E&P companies. After facing a severe liquidity crunch and bankruptcy risk in 2020, many E&P companies have implemented aggressive cost-cutting measures, such as reducing capital expenditures, headcount, dividends, and share buybacks. They have also focused on optimizing their asset portfolios, divesting non-core assets, and consolidating with peers to achieve economies of scale and synergies. These actions have helped E&P companies lower their breakeven costs, increase their margins, and strengthen their balance sheets.
  • Innovation and technology: A third factor that has supported the E&P industry’s growth potential is the continuous innovation and technology adoption by E&P companies. Despite reducing their capital spending, many E&P companies have continued to invest in digitalization, automation, artificial intelligence, and other technologies that can enhance their productivity, efficiency, safety, and environmental performance. For example, some E&P companies have used drones, sensors, cloud computing, and data analytics to monitor their wells, pipelines, and equipment remotely and in real time. These technologies have enabled E&P companies to optimize their operations, reduce their costs, increase their recovery rates, and mitigate their risks.

There are several upcoming important dates and events that could affect the E&P industry’s outlook in the near future:

May 18-20: The Offshore Technology Conference (OTC) will take place in Houston, Texas. The OTC is one of the largest events for the offshore oil and gas industry, where thousands of professionals from around the world gather to exchange ideas, innovations, and best practices. The event could provide insights into the latest trends and developments in the offshore E&P segment.

June 1: OPEC+ group will hold its next meeting to review its production policy. The OPEC+ group consists of 13 members of the Organization of Petroleum Exporting Countries (OPEC) and 10 non-OPEC allies led by Russia. The group has been implementing a historic deal since May 2020 to cut its collective output. Any news on a crack in their resolve to control output, may be a trading opportunity.

Learn About the Direxion Oil and Gas Leveraged ETFs

With the oil and gas market likely to remain tight throughout the year, every potential catalyst could have an outsized impact on stock prices, especially for upstream companies whose stocks are more sensitive to fluctuations in crude oil prices.

For traders chasing maximum yield, it might be worth trying Direxion’s Daily S&P Oil & Gas Exp. & Prod. Bull (GUSH) and Bear (DRIP) 2X Shares. The leveraged ETFs seek 200% or 200% of the inverse (or opposite), respectively, before fees and expenses, of the S&P Oil & Gas Exploration & Production Select Industry Index.

Source: as of May 15, 2023.

The S&P Oil & Gas Exploration & Production Select Industry Index is provided by S&P Dow Jones Indices, LLC and includes domestic companies from the oil and gas exploration and production sub-industry. The Index is a modified equal-weighted index that is designed to measure the performance of a sub-industry or group of sub-industries determined based on the Global Industry Classification Standards (GICS). One cannot directly invest in an index.

With 2X leverage, the results of every trade are magnified which gives traders a way to increase exposure on both bullish and bearish trades. Since losses would also be magnified, it’s still important to manage risk when using these leveraged ETFs. But when used carefully, these can be tools for traders looking to trade their bullish or bearish assumptions about the upstream oil and gas industry.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at A Fund’s prospectus and summary prospectus should be read carefully before investing.

The “S&P Oil & Gas Exploration & Production Select Industry Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Oil & Gas Exploration & Production Select Industry Index.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to investment in the securities of the Oil and Gas Industry Risk and the Energy Sector. Companies in the oil and gas industry develop and produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand both for their specific product or services and for energy products in general. Additional risks include, for the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares, Daily Index Correlation Risk, and for the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Distributor: Foreside Fund Services, LLC.

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