Why Oil Services and Equipment ETFs are Outperforming

February 19th at 10:42am by Tom Lydon

Oil and gas services exchange traded funds have soared 30% or more the past three months and a recent bullish note from Goldman Sachs is helping to drive the rally. Companies are simply flush with cash, which is raising prospects for higher dividend payouts.

“Following four quarters of sequential declines in North American drilling activity and oil service profitability, January is marking a turnaround in activity,” Goldman’s equity analysts wrote in a report. “Revenues/margins for North American service companies either bottomed in fourth-quarter 2012 or are expected to bottom in first-quarter 2013, marking a major inflection for the group.” [Is it Time to Get Into Energy ETFs?]

Some of the major oil and gas services and equipment ETFs reached 52-week highs last Thursday after the bullish report was released by Goldman Sachs, reports Trang Ho for Investor’s Business Daily. The following ETFs ticked up about 3% each: PowerShares Dyanmic Oil and Gas Service ETF (NYSEArca: PXJ), Market Vectors Oil Services (NYSEArca: OIH) and the iShares Dow Jones U.S. Oil Equipment Index (NYSEArca: IEZ). [Energy ETFs Start Second Half with a Bang]

Furthermore, the SPDR Energy Select Sector (NYSEArca: XLE) is just a hair off its 2011 high of $80.90 a share. A period of outperformance potential is expected after the downtrend seen at the start of 2013, reports Tarquin Coe for Investors Intelligence. XLE has gained about 15% over the past three months.

J.C. Parets at All Star Charts notes that energy ETFs are breaking out after lagging the broader market for two years.

Heavy cash flows reported at some major oil and gas service companies equal share buybacks and the possibility of higher dividend payouts. Rising horizontal rig counts are a potential plus, with about 3% more counted now than in the fourth quarter. Leveraged buyouts, asset restructuring, and expansion of margin are all possible catalysts for further growth, due to the increased cash flow. [Oil Services ETF May Have Upside on Production, Supply]

Companies of this nature are sensitive to the capital spending cycle of this industry because most of the new capital is derived from companies drilling new wells. This area of the oil market is highly cyclical and sensitive to the supply and demand relationship, similar to other commodities, reports John Gabriel for Morningstar.

The Wall Street Journal reports that some energy companies are paying fat dividend yields despite low growth prospects.

Related ETFs include:

  • PowerShares Dyanmic Oil and Gas Service ETF (NYSEArca: PXJ)
  • SPDR S&P Oil and Gas Equipment Services (NYSEArca: XES
  • PowerShares Dynamic E&P ETF (NYSEArca: PXE)
  • PowerShares Dynamic Energy ETF (NYSEArca: PXI)
  • iShares Dow Jones U.S. Oil Equipment Index (NYSEArca: IEZ)

SPDR Energy Select Sector

ETF, Oil, Oil and Gas Services, PXJ, XES, OIH, PXE, PXI, IEZ


Tisha Guerrero contributed to this article.

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.