Oil prices have been doing quite well in 2013, as the important commodity has risen thanks to a stronger economic outlook in the U.S., and a rebound in many international markets as well. However, even with the lack of a Fed taper, oil prices have fallen back in recent weeks, leading some to think that the best days of 2013 are behind this energy commodity.
In fact, the United States Oil ETF (USO), which is up about 4.7% on the year, is now down about 7% in the past three months, while its one month return stands at -5%. This suggests a bearish trend is at hand for oil prices, and that investments linked to equities in the space could have some trouble in store in the very near future (see all the Energy ETFs here).
Oil Equities in Focus
We have already started to see this take place in some corners of the oil equity market, with companies that are engaged in some aspect of the hydrocarbon extracting process. In particular though, the oil services space may be the most in trouble, as evidenced by some recent price action in the space.
This corner of the market has actually seen relatively solid earnings, with companies like Halliburton (HAL) and Schlumberger (SLB) leading the way for the space. Both companies actually beat earnings for the period, and are expected to see solid EPS growth for the current year and next periods as well.
However, with tumbling oil prices, the outlook may be a little darker for these companies, and especially so that have big drilling operations. These firms could see slack demand if oil continues to slump, potentially leaving many firms high and dry to end the year.
A Reversal at Hand?
As a result of these lower oil prices, some analysts have begun to cut their estimates for many companies in the sector, pushing the oil-Field Services industry sharply down the Zacks Industry Rank list. This has helped to take many oil service firms off of their peak prices, and it has led to a bit of a decline in Wednesday trading (see all the Energy Sector ETFs).
Should this bearish trend continue, it may suggest that we have already seen the top for oil service companies in 2013 and that now is the time to exit the space. However, if oil prices rebound—or if natural gas can continue to move higher—this might be a nice buying dip for long term investors.
Either way though, an ETF approach could be the way to play this corner of the market. This technique looks to have lower risk levels than what investors see in individual securities, while still tapping into the broad trends in the space.
Fortunately, there are several oil service ETFs currently trading in the market, any of which could help investors accomplish their task of making a targeted bet on the space. Below, we have highlighted some of the most popular choices in this segment, and the key differences between them:
Market Vectors Oil Services ETF (OIH)
This ETF is easily the most popular in the space, with over $1.8 billion in AUM. The ETF tracks the Market Vectors US Listed Oil Services 25 Index, holding companies from around in the world that are in the oil services space (see Energy ETFs Surging on Q3 Earnings).
Top holdings include Schlumberger (SLB), Halliburton (HAL), and National Oilwell Varco (NOV), as these three account for 40% of the total assets. Large caps account for roughly three-fourths of the portfolio, while U.S. stocks make up nearly 75% of the total assets.
OIH is up over 26.4% in the YTD time frame, though it was down 2.2% in Wednesday trading.
iShares U.S. Oil Equipment & Services ETF (IEZ)
Another choice in this corner of the market comes to us from iShares, tracking the Dow Jones US Select Oil Equipment & Services Index. This benchmark provides exposure to 50 companies, taking a cap weighted approach.
Top holdings are once again focused on SLB, HAL, and NOV, with Schlumberger making up over 21% on its own. This fund has more of a U.S. focus than OIH, though it is more spread out from a cap perspective, with 24% going to mid cap stocks.
IEZ also lost about 2.2% in Wednesday trading, though the ETF is up an impressive 27.6% in the YTD period (see all the Top Ranked ETFs).
SPDR S&P Oil & Gas Equipment & Services ETF (XES)
This fund follows an equal weight benchmark for its exposure, though it still tracks a similar basket of equipment and services companies. In total, the ETF holds about 50 stocks in its basket, putting a heavy focus on equipment/services, though drilling companies also account for a decent chunk of assets.
Thanks to the equal weight approach, large caps make up just 22% of assets, leaving big amounts for small and micro cap securities. The top holdings aren’t exactly the most famous either, with Core Laboratories (CLB) and Geospace Technologies (GEOS) barely edging out their competitors with 2.8% of the total assets.
XES lost about 2.1% in Wednesday’s trading session, though the fund is up 24.9% since the start of 2013.
PowerShares Dynamic Oil & Gas Services (PXJ)
This ETF also takes an equal weight approach, tracking the Dynamic Oil Services Intellidex Index. This benchmark evaluates companies based on a variety of investment criteria—such as growth, stock valuations, investment timeliness, and risk—giving a portfolio of 30 stocks in its basket.
Once again, large caps account for a small fraction, only 30% in this ETF, leaving a big chunk for mid and small caps. Plus, thanks to the smaller number of securities, companies take up larger slices of the asset pie, with BHI, SLB, and WFT taking the top three spots and each accounting for 4.9% of assets.
PXJ lost 2.1% in Wednesday trading, though the fund is up 26.3% in the YTD time frame (see Invest in These Fundamentally Strong ETFs).
There has been some rocky trading in the oil services segment of the market lately, as decent earnings haven’t helped to counteract tumbling oil prices. If this trend continues, there is definitely reason to worry, and especially so for companies that have heavy exposure to oil drillers as these companies could definitely cut back when oil prices are plunging.
It is probably too early to panic though, as there have been strong long term gains in the oil service corner of the market, and some selling was probably long overdue. Still, investors thinking about the space need to be concerned, and should definitely watch the earnings estimate revision picture and the price of oil, as if these continue to move south, there could definitely be more trouble on the horizon for the aforementioned oil service ETFs.
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