As oil prices fall, almost $1 trillion in oil projects may be left in limbo, pressuring a segment of the energy sector and related exchange traded funds that cater toward drillers.
Oil services ETFs, like the Market Vectors Oil Service ETF (NYSEArca: OIH), iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ), SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) and PowerShares Dyanmic Oil and Gas Service ETF (NYSEArca: PXJ), are at risk as low oil prices stifle new oil projects. [Energy ETFs: Oil Plunge Is A Catalyst For Consolidation]
Specifically, Goldman Sachs calculate that almost $1 trillion in investments in future oil projects are at risk, especially for those in more expensive Artic oil, deepwater-drilling regions and tar sands from Canada to Venezuela, reports Tom Randall for Bloomerg.
The sudden shift in attitude toward oil projects upends the outlook for oil services.
“The investment thesis for taking a stake in OIH is likely motivated by the fact that the incremental barrel of oil being produced is increasingly coming from areas (deep water, oil shale, the Arctic) that demand more services expertise and technology,” according to Morningstar analyst John Gabriel. “Such a dynamic supports healthy long-term industry trends and pricing power. However, prospective investors should also keep in mind that oil-services firms do tend to move in a somewhat outsized fashion depending on which way the economic winds are blowing.”
Goldman estimates that some $930 billion in investments are no longer profitable with Brent crude at $70 per barrel. Brent crude oil futures dipped to $57.3 per barrel Wednesday, the first close below $60 in over five-years. [Diverging Energy Sector and Oil Futures ETFs]
If the low prices persist, about 800 projects worth $500 billion will be up on the chopping block next year, Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy, said. If oil prices average $70 per barrel next year, about $150 billion will be pulled from oil and gas exploration world wide.
Both OIH and IEZ are based off market cap-weighted indices, so the largest services names have a heavier tilt in the ETFs. XES, on the other hand, weights holdings equally, which makes the SPDR option slightly less top heavy. Additionally, PXJ is fundamentally weighted, weighting components by price momentum, earnings momentum, quality, management action, and value.
Market Vectors Oil Service ETF
For more information on the oil & gas industry, visit our energy category.
Max Chen 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.