Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) step into the earnings confessional today, potentially bringing with them increased activity for leveraged energy sector exchange-traded funds.
The bullish ERX looks to deliver double the daily returns of the Energy Select Sector Index while the bearish ERY seeks performances that are double the daily inverse returns of that benchmark.
Why It's Important
With 2020 likely to go down as one of the worst and most volatile years on record for the energy sector, it's not surprising that Wall Street is expecting losses from both Exxon and Chevron. Analysts expect a June quarter loss of 62 cents a share out of Exxon and a loss of 93 cents from Chevron.
Whatever the results are, it will be relevant to traders deploying ERX and ERY today because the Energy Select Sector Index devotes 46% of its combined weight to the two giants of the U.S. oil industry.
One of the Exxon-specific issues that could put ERX and ERY in play today is the company's commentary on its dividend. Exxon, which yields north of 8%, doesn't generate enough cash flow to cover the payout, but it also appears loath to cut the dividend.
The company “is preparing deep spending and job cuts, according to people familiar with the matter, as it fights to preserve a 8% shareholder dividend with a multi-billion-dollar quarterly loss looming,” according to Reuters.
Exxon's annual dividend expense is $15 billion, assuming no alterations are made.
One day doesn't make a trend, but if Thursday's action is any indication, traders are warming to the idea of ERY being the way to go today. The double-leveraged bearish energy ETF jumped 7.72% yesterday on nearly double the average daily volume while the bullish ERX slumped 7.59%.
“Aside from the typical interest in sources and uses of cash (and in particular, Chevron’s ability to sustain its dividend), we will be interested to hear more on activity levels in the Permian Basin and Williston Basin, as these are the primary U.S. operating regions for Chevron’s pending acquisition target Noble Energy,” notes CFRA analyst Stewart Glickman.
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