Though earnings in the energy sector have improved in the third quarter with an earnings beat ratio of 72.7% as per the Earnings Outlook, it continues to be the biggest drag on the overall S&P 500 earnings growth picture. Total earnings from 82.4% of the sector’s total market capitalization reported so far are down 63.1% on a 13.7% revenue decline. Revenue beat of 36.7% remains unimpressive.

In particular, the biggest U.S. energy producers – Exxon Mobil (XOM - Analyst Report) , Chevron (CVX - Analyst Report) and ConocoPhillips (COP - Analyst Report) – posted a substantial drop in year-over-year earnings. While XOM surpassed our earnings estimates, CVX and COP missed on the bottom line.

Earnings in Focus

The largest U.S. oil company, Exxon Mobil, reported earnings per share of 63 cents, trumping the Zacks Consensus Estimate by 3 cents but declining from the year-ago earnings of $1.01. Total revenue plunged 13% year over year to $58.68 billion and was below our $60.56 billion estimates. Shares of XOM dropped 2.5% soon after the earnings release on October 28.

Chevron, which trails Exxon Mobil, topped our expectation on both the top and bottom lines buoyed by the success of its cost savings initiatives amid a protracted oil price rout. Earnings per share came in at 68 cents, much above the Zacks Consensus Estimate of 39 cents but lower than the year-ago earnings of $1.09. Revenues dropped 12% year over year to $30.14 billion but were above the Zacks Consensus Estimate of $30.06 billion. The stock climbed as much as 5.1% following the earnings announcement on October 28.

ConocoPhillips reported a loss of 66 cents per share, narrower than the Zacks Consensus Estimate of a loss of 69 cents but wider than the year-ago loss of 38 cents. Revenues declined 13.2% year over year to $6.52 billion and missed our estimate of $6.54 billion. The stock jumped as much as 7.3% on the day of earnings release on October 27.

Investors should note that all the three stocks have a dismal VGM score of F each with Chevron having a Zacks Rank #2 (Buy) and Chevron and ConocoPhillips carrying a Zacks Rank #3 (Hold).

BHI-GE Deal in Focus

Consolidation is picking up in the energy sector due to the protracted oil price rout. The latest catalyst is the oilfield services provider Baker Hughes (BHI - Analyst Report) agreeing to merge with the oil and gas unit of General Electric (GE - Analyst Report) . The combination will create the second-largest oilfield service player in the world with annual revenues of more than $32 billion leapfrogging Haliburton (HAL - Analyst Report) but trailing Schlumberger (SLB - Analyst Report).

Under the terms of the deal, GE will own 62.5% of the merged entity while the rest goes to BHI shareholders. The conglomerate will contribute $7.4 billion to fund a special dividend of $17.50 per share to Baker Hughes’ stockholders. The transaction, awaiting Baker Hughes shareholders and regulatory approval, is expected to close in mid-2017.

Shares of BHI dropped 7% on the announcement of the deal on October 31. Baker Hughes has a Zacks Rank #1 (Strong Buy) with a VGM Style Score of C.

ETFs in Focus

Given better-than-expected earnings from the three oil giants and the BHI-GE deal, energy ETFs will be on investors’ radar in the coming days. Below, we have highlighted four funds with the largest allocation to these energy behemoths.

iShares U.S. Energy ETF (IYE - ETF report)

This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to the broad energy space. It holds 72 stocks in its basket with AUM of $1.2 billion and average daily volume of more than 1.4 million shares. The product charges 44 bps in fees per year from investors. Exxon Mobil and Chevron occupy the top two positions in the basket taking the bigger chunk of assets at 23.9% and 13.7%, respectively, while ConocoPhillips and Baker Hughes make up for a combined 5.4% of assets. From a sector perspective, integrated oil & gas makes up for 41.4% share while oil exploration & production, and oil equipment & services round off the next two spots with a double-digit exposure each.

Energy Select Sector SPDR (XLE - ETF report)

This is the largest and most popular ETF in the energy space with AUM of $15 billion and average daily volume of around 14.8 million shares per day. Expense ratio comes in at 0.14%. The fund follows the Energy Select Sector Index and holds 38 securities in its basket. XOM and CVX occupy the top two spots with 17.1% and 14.8% share, respectively, while COP and BHI collectively make up for 5.2% share. In terms of industrial exposure, oil, gas & consumable fuels account for nearly 82.9% of the portfolio while energy equipment & services take the remainder.

Fidelity MSCI Energy Index ETF (FENY - ETF report)

The fund follows the MSCI USA IMI Energy Index, holding 122 stocks in its basket. Out of these, XOM and CVX take the top two spots at 23.5% and 13.6%, respectively, while COP and BHI collectively account for 5.2% share. In terms of industrial exposure, oil, gas & consumable fuels account for nearly 82.9% of the portfolio while energy equipment & services take the remainder. The product charges 8 bps in annual fees and trades in a good volume of about 166,000 shares. It has accumulated $425.4 million in its asset base.
Vanguard Energy ETF (VDE - ETF report) VDE

This fund manages over $3.8 billion in asset base and provides exposure to a basket of 133 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product sees a good volume of about 250,000 shares and charges 10 bps in annual fees. Here again, Exxon and Chevron are the top firms with 22% and 12.4% allocation, respectively, while COP and BHI account for nearly 5% of the portfolio. Though the product is skewed toward the integrated oil & gas sector with 38% of assets, oil exploration, and production, and oil equipment services also provide a nice mix in the portfolio with a double-digit exposure each.