Market Overview

Give GUSH A Gander As Energy Companies Cut Back On Wasteful Spending

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Give GUSH A Gander As Energy Companies Cut Back On Wasteful Spending

The energy sector was the worst-performing group in the S&P 500 last year. The coronavirus pandemic had plenty to do that because it exposed a slew of flimsy balance sheets in the sector.

What Happened

During bygone eras of high oil prices, energy companies, exploration and production firms in particular, took on large amounts of debt to boost debt, a practice that came home to roost last year.

Predictably, that led to problems for leveraged exchange traded funds, namely the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (NYSE: GUSH). GUSH looks to deliver double the daily returns of the S&P Oil & Gas Exploration & Production Select Industry Index.

Why It's Important

While the global economic recovery is expected to be bumpy this year, opportunity remains with GUSH, particularly if oil prices steady and energy companies remain prudent with their spending.

“Oil and natural gas prices will average within our medium-term ranges in 2021 as markets keep rebalancing amid an uneven global economic recovery,” notes Moody's Investors Service. “Sharply diverging growth trajectories between Asia and the US and Europe, and across different industries, will extend an uneven recovery in demand, keeping oil and gas prices volatile and sensitive to changes in supply. A continued recovery in global oil demand depends in part on effective pandemic management around the world.”

Obviously, GUSH is a short-term instrument and should always be treated as such, but it's one to watch this year because the recent oil bear market is similar to prior ones and with enthusiasm for cyclical stocks renewed, the Direxion fund could deliver at various points in 2021.

What's Next

The case for GUSH could be bolstered if exploration and production firms manage expenses and generate some free cash flow this year.

“The E&P sector will continue to heal in 2021 from the downturn with low capital spending keeping growth in check,” said Moody's. “But producers will have more capacity in 2021 to produce free cash flow, thanks to higher prices, low costs, a focus on best assets,marginal efficiency gains, and reduced shareholder distributions. Stronger producers will lead the recovery, pursuing consolidation opportunities to become more cost-competitive, increase scale and capital flexibility, and rationalize higher-cost production. But leveraged and inefficient producers will face mounting liquidity and insolvency risks.”

 

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