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From Russia With no Love for Oil Services Stocks, ETFs

Oil services stocks and the corresponding exchange traded funds have been leaders in the energy sector’s rally this year, but that leadership is in danger as sanctions against Russia restrict activity there by Western energy firms.

Shares of Schlumberger (SLB), the world’s largest provider of oilfield services, are off 1.1% Tuesday after the company said third-quarter earnings will be dinged by the sanctions against Russia.

“The sanctions are placing some restrictions on the engagement of certain people and equipment in our Russian operations which in the short term will have an impact on operational efficiency and costs in Russia. The financial impact of the sanctions in the third quarter is limited, and is currently estimated to be up to $0.03 of earnings per share,” said Schlumberger in a statement.

Lower earnings for Schlumberger could prove problematic for oil services ETFs, particularly the Market Vectors Oil Services (OIH) and the iShares Dow Jones U.S. Oil Equipment Index ETF (IEZ) .

Home to almost $2 billion in combined assets under management, OIH and IEZ are cap-weighted ETFs, each of which devotes an arguably excessive portion of its weight to Schlumberger. OIH allocates 20.6% of its weight to Schlumberger while IEZ has an almost 22% weigh to the stock. [Oil Services ETFs Lead Energy Rally]

OIH and IEZ are two of the best-performing energy ETFs over the past month, but those funds’ Russia exposure does not end with Schlumberger. Halliburton (HAL), Baker Hughes (BHI) and Weatherford International (WFT) “each generate 4 percent to 5 percent of their global sales from Russia, while Schlumberger gets 5 percent to 6 percent,” David Wethe reports for Bloomberg, citing RBC Capital Markets.

Halliburton, Baker Hughes and Weatherford combine for 22.4% of OIH’s weight, according to Market Vectors data.

While North American shale markets have been primary drivers of top and bottom line growth for oil services firms in recent years, the allure of Russia is too compelling to resist for Western oil firms. Global oil giants from Exxon Mobil (XOM), the largest U.S. oil company, to BP (BP), Europe’s second-largest oil company, have been lured to Russia and need the services provided by the companies found in OIH and IEZ to tap some of the largest non-OPEC reserves.

Exxon is paying tens of billions of dollars to partner with OAO Rosneft to tap Russia’s Arctic region. Overall, exploration and production companies are expected to spend nearly $52 billion in Russia this year, according to Bloomberg. [ETF Ideas for Mexico's Energy Boom]

Investors looking to stay involved with the oil services industry in the face of Russian sanctions can consider the $318 million SPDR Oil & Gas Equipment & Services ETF (XES) .

As an equal-weight ETF, XES allocates no more than 2.66% of its weight to any of its 52 holdings. Halliburton and Schlumberger combine for less than 5% of the ETF’s weight. XES is up 9.1% in the past six months. [A Unique Oil Services ETF]

Market Vectors Oil Service ETF