Investors will soon be able to play the energy sector with the Market Vectors Unconventional Oil & Gas Exchange Traded Fund (ARCA:FRAK), an ETF designed to track the performance of an index of companies involved with the unconventional oil and gas segment. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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The ETF is being sponsored by Van Eck Global, which also sponsors the Market Vectors Gold Miners ETF (ARCA:GDX), as well as dozens of other ETFs. The ETF tracks the Market Vectors Unconventional Oil & Gas Index, which is composed of 43 companies that are involved with the exploration, refining, extraction or production of oil and natural gas from unconventional plays.
Van Eck Global defines a play as unconventional if it produces from coal beds or coal seams, shale oil or gas, tight natural gas, tight oil and tight sands. This puts most of the most popular onshore plays into this category.
To be included in the index, a company must have a majority of its revenues from these plays, or the potential for it, and have a minimum market capitalization of $150 million. Van Eck Global also utilizes minimum trading volume and share requirements to ensure liquidity. The index is dominated by U.S.-based companies, which comprises 71% of the index, with Canadian companies at 28%.
The top five companies comprise approximately 25% of the Market Vectors Unconventional Oil & Gas Index, so an examination of these companies and assets seems warranted.
Occidental Petroleum (NYSE:OXY) is 8.49% of the index and is one of the largest operators in the Permian Basin, with production of 198,000 barrels of oil equivalent (BOE) per day in 2011.
Occidental Petroleum is also a large acreage holder and producer in California and has several promising unconventional plays that are being explored and developed by the company in that state. The company plans to drill approximately 140 shale wells in the first half of 2012 in California.
Although Canadian Natural Resources Ltd (NYSE:CNQ) is not well known to many Americans, the company is one of the largest energy companies in Canada, with a market capitalization of $40 billion. The company reported production of 613,000 BOE per day in the third quarter of 2011.
Canadian Natural Resources Ltd has a major position in various unconventional natural gas fields in Western Canada, with an estimated 6 Tcfe of proved and probable reserves. The company represents 7.60% of the index value.
EOG Resources (NYSE:EOG) and Devon Energy (NYSE:DVN) comprise 7.4% and 6.42% of the index, respectively. Both these companies are well-known domestic producers with positions in all the major domestic unconventional plays in North America.
Hess Corp (NYSE:HES) is 5.1% of the index and has established positions in the Bakken, Eagle Ford Shale and Utica Shale. The Bakken in North Dakota will be the main focus for the company in 2012, and Hess Corp plans to operate 16 rigs on its 900,000 net acre position during the year.
The Bottom Line
The Market Vectors Unconventional Oil & Gas ETF is an intriguing method of investing in companies involved with North American shale and unconventional oil and gas development. The sponsor might want to consider another ETF that tracks the performance of oil service companies involved with these plays. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.