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Oil Services ETFs: Recovery Faces Tests

This article was originally published on ETFTrends.com.

Oil services stocks and exchange traded funds have actively participated in the energy sector rally. For example, the VanEck Vectors Oil Service ETF (OIH) is up more than 16% since the start of the second quarter.

Other oil services ETFs include the iShares U.S. Oil Equipment & Services ETF (IEZ), PowerShares Dyanmic Oil & Gas Services Portfolio (PXJ) and SPDR Oil & Gas Equipment & Services ETF (XES) . These services ETFs include big names like Schlumberger and Halliburton that provide the necessary equipment to drill and maintain oil producing operations.

Oil services stocks are usually highly correlated to oil prices, but some analysts believe if oil prices falter, that is an opportunity to get involved with oil-field services providers.

“While oil prices have been on the rise in recent months, it's been a bumpy ride. Yet Credit Suisse's James Wicklund argues that any weakness in crude is an opportunity to add to or initiate positions in oilfield-services stocks,” reports Teresa Rivas for Barron's.

Inside The Industry

The U.S. energy sector have been able to easily access and raise capital, which has led to higher oil production capacity within the industry. Furthermore, improving technologies, notably hydraulic fracturing or fracking technologies, have allowed the U.S. energy sector pump out more oil and achieve profits even as crude prices dipped below their most recent cyclical peaks.

“Lower oil prices may reduce the amount of cash returned to E&P shareholders but this is where the complaint of OFS stocks not keeping pace with oil prices provides an opportunity,” said Wicklund in a note cited by Barron's.

OIH tracks the 25 largest oil services companies in the space. Both XES and IEZ track a slightly broader 37 components, but XES follows a more equal-weight indexing methodology that favors midsized companies while IEZ reflects a traditional market cap-weighted indexing methodology. Lastly, PXJ follows a fundamentally weighted index, which selects stocks based on price momentum, earnings momentum, quality, management action, and value.

“While the retreat in oil prices from four-year highs has reduced the outlook for deepwater stocks--not surprisingly, given the expense of extracting crude from the bottom of the ocean--Wicklund argues that E&P companies' conservative budgets means that onshore and shallow water activity wont' be hurt, and 'the recovery is well underway,'” reports Barron's

For more news on oil ETFs, visit our energy category.