Oil Services ETFs may be Saying the Worst is Over
The price action for oil services stocks and exchange traded funds is often beholden to oil futures’ price action. Sometimes, that is a bad thing, as was the case in 2014 when the Market Vectors Oil Service ETF (OIH) slid 23.5% compared to an 8.7% loss by the Energy Select Sector SPDR (XLE) .
Oil services ETFs have recently rebounded in earnest with OIH, the group’s largest ETF, surging 12.3% over the past month while the iShares U.S. Oil Equipment & Services ETF (IEZ) and the SPDR Oil & Gas Equipment & Services ETF (XES) are each up more than 10% over that time.
With analysts having taken the knife to profit and revenue forecasts, the recent appreciation by oil services ETFs could be a sign the group has bottomed and is poised for further upside. [Oil Services ETF Gains Momentum]
“This industry’s forward revenues and earnings had been at record highs in early October, but have fallen 28.5% and 58.3% in the past six months. Consensus annual forecasts imply that analysts expect revenues to fall 19.9% in 2015 after rising 6.6% in 2014, and they expect earnings to drop 48.9% following a 23.0% gain in 2014,” according to Yardeni Research.
Earlier this week, S&P Capital IQ had this to say regarding Halliburton (HAL), the second-largest oil services provider: “We cut our ’15 EPS estimate by $1.79 to $1.17, and ’16′s by $1.64 to $1.51. We lift our 12-month target by $11 to $51, a 10X multiple of enterprise value to projected ’16 EBITDA, a premium to HAL’s historical average, but a discount to Schlumberger . Q1 operating EPS of $0.49 vs. $0.73, beat the Capital IQ consensus estimate by $0.11. HAL noted that its cost base is probably being kept higher than it might typically be during an industry downturn, given the pending Baker Hughes merger. We think HAL is a prime beneficiary when North America recovers.”
Halliburton is the second-largest holding in both OIH and IEZ at weights of 11.5% and 9.9%, respectively. This month, more than half of analysts’ oil services earnings revisions have been negative, according to Yardeni Research.
Since the sector’s sell-off, many energy names are trading at cheaper values relative to the broader market. For instance, IEZ has a 17.49 price-to-earnings ratio and a 1.28 price-to-book while XES shows a 15.04 P/E and a 0.92 P/B. [Oil Services ETF Could Surge]
Investors should keep in mind that the oil services sector is heavily reliant on capital spending cycles in the energy industry. The recent sharp cuts in capital expenditure budgets in 2015 contributed to the pullback in oil services – U.S. companies are expected to spend about 20% less than the average over 2014, with some cutting expenditures by around 50%.
SPDR Oil & Gas Equipment & Services ETF
