An emerging energy ETF, code-named FRAK, is generating a great deal of interest from investors who feel President Obama may not succeed in getting re-elected. That, of course, is pure speculation, but the President’s actions regarding fossil fuels could shape the financial future of domestic energy production--especially shale oil and gas extraction.
Now there’s a brand new exchange-traded fund called the Market Vectors Unconventional Oil and Gas ETF (the stock symbol is “FRAK”) that may act as a good barometer of the investing side of the shale oil and gas market, and it may tell how who gets elected this November may trigger either a big run-up or pullback from FRAK, in particular, and shale energy sources, in general.
That’s the table-setter. Now let’s take a look at what the professionals see when they look at FRAK, which was opened in February 2012 by the Van Eck Global fund family, the 5th largest ETF provider in the U.S.
Mitt Romney, the presumed Republican nominee for President, certainly seems supportive of the shale industry. In a March 5, 2012 editorial that appeared in the Columbus (Ohio) Dispatch, Romney had this to say on the different approaches he and President Obama would take in regards to U.S. shale oil reserves:
The goal of my energy policy is straightforward: guarantee America the most affordable and reliable supply in the world. Ohio is seeing firsthand the potential of this approach in the Marcellus shale. The natural-gas revolution is creating direct jobs in construction and drilling, and producing a resurgence in American manufacturing. In the next couple of years, billions of dollars will be invested in the state in pursuit of these opportunities.
President Barack Obama has a different goal: higher prices, lower production and a government-led “green” industry. Ohio is seeing the effects of this approach, as well. The average family’s energy bill has jumped by thousands of dollars during his presidency. Gasoline-price increases alone have cost the middle class as much as would doubling the income-tax rate.
FRAK investors are betting that Romney’s vision of shale oil and gas will prevail after the first Tuesday of November. Even if he doesn’t win, domestic shale production won’t go away, although it may be muted somewhat given the aggressive regulatory tack taken by the U.S. Environment Protection Agency under President Obama.
So where does that leave FRAK? Pretty much, it’s self-described as a go-to ETF option for “unconventional” U.S. energy resources that should fare better in a Romney White House than an Obama White House.
It’s all in the ingredients. Along with shale oil and shale gas, FRAK’s managers say unconventional energy resources included in the fund include coalbed methane, tight natural gas, tight oil and tight sands.
At about 72%, not all of FRAK’s energy holdings are in the U.S. The fund also has 28% of its holdings in Canadian (mostly shale oil and gas) companies, with large-cap energy companies comprising about 80% of the portfolio.
FRAK has had a tough start since its February 14, 2012 launch date – it’s off by -5.14% as of March 31, 2012. Here are the ETF’s top holdings:
% of Total
|Occidental Petroleum Corp.|
|Canadian Natural Resources Ltd.|
|EOG Resources Inc.|
|Devon Energy Corp.|
|The Williams Cos Inc.|
|Noble Energy Inc.|
|Chesapeake Energy Corp.|
|Pioneer Natural Resources Co.|
While fracing has enabled shale producers to more easily extract oil and gas out of the ground, the primary risk from investing in FRAK is that a tougher regulatory stance on fracing from the EPA would presumably gain strength in the event of a second Obama term in the White House.
Zacks Research notes that the large-cap energy stocks that dominate the fund’s holdings are fairly stable and have ample cash positions that allow them to weather any turbulent regulatory storms. But if those regulators are too severe, that could well tamp the growth of FRAK down in 2013 and beyond.
“The biggest concern that investors should have when taking a look at this sector comes from an environmental perspective,” says Zacks in a March 2012 research report. “There is growing concern over how these techniques and the relatively new technologies impact water supplies in the regions. Of greatest worry is how some of the chemicals used in the process stay in the earth and if this can impact groundwater and render it undrinkable.”
“As a result of this, as well as a variety of bad press from many groups, some are looking to ban certain types of fracing until more is known about the process. If this trend becomes more widespread or more environmental concerns hit the market, the boom in unconventional oil and gas could quickly peter out.”
Zacks does say that if the EPA pulls back, and fracing regulations remain on the “back burner”, shale oil and gas exploration should see “strong growth for the foreseeable future”.
Consequently, if you’re inclined to view the Presidential election going one way or another this November, FRAK may be the best – or worst -- friend an unconventional energy investor can have.
We’ll give Zacks the last word on the matter, which suggests that an ETF may be a better choice for shale investors than individual stocks until the dust settles on the regulatory front.
“This could be especially true if commodity prices remain relatively high or if the U.S. economy looks poised to take further advantage of the vast supplies of natural gas at its doorstep. If investors are believers in these trends, FRAK represents an interesting choice. Since it is relatively diversified, single company issues aren’t likely to weigh on the product too heavily, allowing investors to play off of the trend from an industry perspective. While this could reduce the overall return, it looks to keep risks to a minimum as well, suggesting that it could be an interesting choice for those who wanted more exposure to the segment but are concerned that new environmental rules could weigh down a few bad apples in the bunch.”
But make no mistake, who wins the White House this year may bend the odds on just how much of that “risk” shale investors want to absorb.