Earlier this week, exchange traded funds holding oil services stocks extended months worth of declines after SeaDrill (NYSE: SDRL) said it is suspending its $1 per share quarterly dividend until at least the end of 2015.
The news of SeaDrill’s suspended dividend sent shares of the Market Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services ETF, tumbling 3.5% to the fund’s lowest levels in over a year. All that simply because of a 3% weight to SeaDrill as of Nov. 26. [SeaDrill Drills Oil Services ETFs]
OIH’s primary rival, the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ), lost nearly 3% and, like OIH, did so on heavy volume on a day usually known for lethargic turnover on Wall Street. Indicating that analysts and investors are fearful more negative dividend awaits the oil services group, IEZ was taken to task Wednesday despite featuring no exposure to SeaDrill.
Those fears are well-founded. In a note obtained by Barron’s, Zephirin Group identified several oil services companies that are candidates for negative dividend action. The research firm said it was “premature” of Atwood Oceanics (NYSE: ATW) to initiate a dividend while noting Diamond Offshore’s (NYSE: DO) special dividend policy is at risk.
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, Ensco (NYSE: ESV) and Noble (NYSE: NE), indicating traders are expecting bad news of some form from those companies as well. [Negative Dividend Chatter an Issue for Oil Services ETFs]
Diamond Offshore, Ensco and Noble combine for 8.2% of OIH’s weight. The ETF currently features no exposure to Atwood Oceanics.
Transocean (NYSE: RIG), which reinstated its dividend due in large part from pressure by financier Carl Icahn, is widely believed to be another oil services dividend cutter. Currently yielding 11.9%, Transocean has plunged 53% this year, but that is not stopping traders from betting on more downside.
The stock closed at $23.27 Wednesday, or barely more than half its price in early May 2010, then its nadir following the Gulf of Mexico oil spill. Transocean currently accounts for 3.6% of OIH’s weight and 2.4% of IEZ.
Market Vectors Oil Service ETF