Oil services stocks and exchange traded funds have not been immune from the recent swoon afflicting the energy patch.
Sensitive to fluctuations in oil prices, the Market Vectors Oil Service ETF (NYSEArca: OIH) and the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) have been displaying that sensitivity in significant fashion, falling an average of 18.3% over the past 90 days while the United States Oil Fund (NYSEArca: USO) is down “just” 11.2% over the same period. [Investors Flee Commodity ETFs]
Falling oil prices are not the only thing pressuring IEZ and OIH these days. Increasing speculation, though not new, that some offshore drillers are poised to pare their dividends has also become a thorn in the side of oil services ETFs after these funds displayed strength during the energy sector rally earlier this year. [Oil Services ETFs Look Ready to Rally]
Soaring credit default swaps (CDS), the instrument used by bond traders to protect against issuer default, have recently surged for offshore drillers such as Diamond Offshore (NYSE: DO), Ensco (NYSE: ESV) and Noble (NYSE: NE).
“By leveraging its balance sheet, Diamond Offshore has managed to, and may for a bit longer, defend its total dividend payout. But, we have held and maintain that, at some point in this downturn, it will slash the recurring special dividend,” said FBR analysts in a note recently posted by Barron’s.
Noble, Ensco and Diamond Offshore combine for about 6.5% of OIH’s weight. Although shares of Diamond Offshore, which hit a new 52-week low last Friday, yield just 1.5%, the company has history of paying special dividends.
Perhaps more problematic for OIH and IEZ is the speculation about Transocean’s (NYSE: RIG) dividend, one that was reinstated due in large part from pressure by financier Carl Icahn.
Transocean’s “debt securities have been the worst performers in the $4 trillion Bloomberg US Corporate Bond index this quarter as default swaps indicate the biggest deterioration in creditworthiness among peers. Barclays Plc cut its 2015 cash flow forecast for Transocean by 22 percent this month to $2.5 billion, saying the “have-it-all” strategy is unsustainable,” Bloomberg reported last month.
With last Friday’s 4.5% drop to the levels that are well below where it traded in the aftermath of the 2010 Gulf of Mexico oil spill, Transocean now sports a dividend yield of 9.5%. The stock is 4.1% of OIH’s weight and 3% of IEZ’s weight.
However, a case can be made that markets are unjustly punishing the oil services ETFs on dividend reduction speculation while ignoring the recent dividend growth of the ETFs’ largest holdings. [Oil Services ETFs See Growing Dividends]
Schlumberger (NYSE: SLB), the world’s largest oil services provider, has nearly doubled its payout since 2011. Halliburton (NYSE: HAL), Schlumberger’s primary rival, has boosted its dividend by two-thirds since 2012. National Oilwell Varco (NYSE: NOV), a wide moat stock and a holding at Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A), has roughly quadrupled its payout in just the past year. Those three stocks combine for nearly 42% of OIH’s weight and almost 40% of IEZ.
Market Vectors Oil Service ETF
