On another dark day for oil prices, oil services stocks and exchange traded funds are finding some surprising, albeit modest relief with the Market Vectors Oil Service ETF (NYSEArca: OIH) trading slightly higher at this writing.
Still, OIH and the rival iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) are down an average of 20% over the past 90 days, the definition of a bear market. With traders reluctant to bet on a bottom for oil prices, oil services ETFs remain vulnerable to further downside and investors should be prepared for some less-than-pleasant 2015 earnings guidance from the industry.
“Fourth-quarter results should be fine but 2015 guidance will be nasty. The stocks will bottom before the rig count does (historically three to six months before) but that time is not yet. On a relative basis larger-cap oilfield services (OFS) stocks likely fair better in this tough environment but beta names will lead off the bottom,” said Credit Suisse in note posted by Barron’s Tuesday.
Earlier Tuesday, Sterne Agee pared its earnings outlook for the oil services group, not surprisingly citing, sagging oil prices while warning of negative EPS revisions to come.
While higher beta names may lead an oil services resurgence, traders are not betting that rebound will materialize in the near-term. Data indicate sentiment is going in the opposite direction. On Monday, a trader bought 11,000 August 7-strike puts for an average price of 55 cents in Weatherford International (NYSE: WFT), according to CNBC.
In order for those puts to become profitable, shares of Weatherford must fall below $6.45 by August expiration, a long way from the $10 area in which the stock currently resides. Weatherford is OIH’s ninth-largest holding at a weight of almost 3.8%. [Oil Services ETFs for Contrarian Investors]
If there is a silver lining for oil services ETFs, it is twofold. First, valuations for some of the strongest names in the group are compelling. Second, those strong names, while familiar, are becoming easier to identify.
With the Halliburton’s (NYSE: HAL) pending acquisition of Baker Hughes (NYSE: BHI) that combined company along with Schlumberger (NYSE: SLB) will control 62% of the market for drilling technology services. Additionally, National Oilwell Varco (NYSE: NOV), another higher quality oil services name, continues to be a rumored takeover target as its shares have dipped 15% over the past year.
The average P/E on Sclumberger, Halliburton and National Oilwell is now below 13, well below that of the S&P 500. [Contrarian ETF Ideas for 2015]
Market Vectors Oil Service ETF
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.