Energy stocks and exchange traded funds have been solid performers this year as the sector has benefited from the rotation to value sectors away from higher beta, momentum equities.
The Energy Select Sector SPDR (NYSEArca: XLE) entered Wednesday with a year-to-date gain of 9.5%, trailing only the Utilities Select Sector SPDR (NYSEArca: XLU) among the nine sector SPDRs this year. Despite a mediocre first quarter in terms of S&P 500 earnings growth, the energy sector was one of just a few groups to post double-digit EPS growth. [Q1 Earnings Review Among Sector ETFs]
Oil services stocks have been key contributors to the energy’s recent upside. The $1.3 billion Market Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services ETF, is one of the nine equity-based energy funds that rank among the top-25 non-leveraged ETFs over the past three months.
That could be a sign the market has been pricing in stout estimated earnings growth along with the recent jump in oil prices.
Analysts are forecasting 26% earnings growth for Halliburton (NYSE: HAL) this year, 28% in 2015 and 25% in the current quarter, reports Ken Hoover for Investor’s Business Daily. Analysts also expect Schlumberger (NYSE: SLB), the world’s largest oilfield services company, to post 2014 EPS growth of 20%, according to IBD.
Schlumberger and Halliburton combine for over a third of OIH’s weight. Under any circumstances, the EPS outlook for OIH’s largest holdings would be considered impressive, but it is even more so when factoring weak overall expectations for S&P 500 second-quarter earnings.
“Of the 494 companies that have reported, 118 have issued guidance for the next quarter–104 of those have been negative, 13 are positive, and only one is in-line. This produces a negative-to-positive (N/P) ratio of 8, tied with fourth quarter of 2013 for the highest N/P ratio in 15 years,” said S&P Capital IQ in a research note.
Oil services spending is also growing, another bullish sign for the sector. Earlier this year, Barclays forecast an industrywide capital spending increase in the U.S. and Canada of 7% following two years of spending growth below 5%. [North America Activity Drives Oil Services ETFs]
There is another favorable catalyst from the oil services group for longer-term investors. While the industry does not yet have the dividend reputation of the integrated oil space, it is worth noting oil services payouts are rising.
Schlumberger’s most recent dividend hike was 29% and the company’s payout is up fourfold over the past decade. Halliburton’s dividend is up 66.7% in less than two years. National Oilwell Varco (NYSE: NOV), OIH’s third-largest holding at 7.3% of the ETF’s weight, earlier this week said it will double its quarterly payout.
Market Vectors Oil Service ETF
