A Pre-Earnings Look at the Oil Services ETF

ETF Trends

Bolstered by strong U.S. economic data and concerns that escalating tensions in Egypt could threaten supply traveling through the Suez Canal, oil futures have soared in recent weeks. The U.S. Oil Fund (USO) has jumped more than 8% in the past month, but equity-based ETFs have lagged their futures-based counterparts.

The Energy Select Sector SPDR (XLE) is up a mere 2.5% over the same time, a performance that not only lags USO, but that of the S&P 500 as well. Oil services stocks and the Market Vectors Oil Services ETF (OIH) have been better than their exploration and production and integrated clients as OIH has popped 5.3% in the past four weeks. [Surging Oil Prices Lift ETFs]

Fundamentals for OIH and its 26 constituents will be in the spotlight later this week as second-quarter earnings reports for the oil services group start rolling in. Oil services earnings season always starts with a bang for OIH because the two of the marquee names in the group are among the first to deliver results are Schlumberger (SLB) and Halliburton (HAL). The two largest oilfield services firms in the world combine for 28.6% of the ETF’s weight. [Energy Sector ETFs Heating Up]

Schlumberger and Baker Hughes (BHI), OIH’s fourth-largest holding, deliver results Friday. Despite soaring U.S. oil production, investors may want to take a cautious approach to OIH ahead of earnings. “Demand for domestic onshore rigs has dropped along with drilling activity because of low U.S. natural gas prices, though the decline has been tempered somewhat by demand for onshore rigs in shale plays,” reports Harry Weber for the Fuel Fix blog. Weber went on to note that in May, “Halliburton warned investors that its second-quarter operating profit margin would be hurt by a decline in rigs working in Mexico.”

While North America remains a key driver of revenue for oil service firms, international markets are growing parts of top- and bottom-line growth for these companies as well. A difficult operating environment in Brazil, home to perhaps the largest pre-salt reserves in the world, is crimping operating margins for some European oil services firms, reports Stephen Eisenhammer for Reuters.

With Brazil accounting for 27% of all deep- and ultra-deep offshore wells drilled in the last two years, according to Reuters, leaving the fast-growing is not a choice most oil services firms want to make even if operating there subjects them to higher costs and taxes along with less-than-desirable margins.

On the upside, many of OIH’s largest holdings are still more exposed to North America than other markets. For what it is worth, National Oilwell Varco (NOV), Halliburton and Baker Hughes were all recently on the receiving end of bullish chatter on CNBC. That trio represents 20% of OIH’s weight.

Market Vectors Oil Services ETF

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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