Oil drilling and services companies, along with related exchange traded funds, could be the first to collapse in the ongoing oil rout, followed by energy explorers.
The Market Vectors Oil Service ETF (NYSEArca: OIH), iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) all cover the energy sector’s drilling equipment and services providers. They have been among the worst performing energy sub-sector, with OIH falling 27.0% over the past year, IEZ declining 25.5% and XES decreasing 39.3%. [Hits Keep Coming for Oil Services ETFs]
In contrast, the broader energy sector as represented by the Energy Select Sector SPDR (NYSEArca: XLE) only dipped 9.6% over the past year. Energy equipment and services companies make up 18.1% of XLE.
John T. Young of Conway Mackenzie Inc., the largest U.S. restructuring firm, argues companies that drill wells and manage fields on behalf of oil producers will be the first to topple during the second quarter, reports Joe Carroll for Bloomberg.
“The second quarter is going to be devastating for the service companies,” Young said in the Bloomberg article. “There are certainly companies that are going to die.”
Specifically, Young points to a “double-whammy” as oil companies negotiate for a 20% to 30% price reduction on services and extend wait periods on bills, which have distended the cash-flow gaps for services firms. Consequently, some oil services firms could find themselves strapped for cash.
“When I saw WTI hit $65, I thought we’re going to be really busy with restructurings,” Young added. “When it hit the $40s, I knew we were looking at outright liquidations.”