“New wells can cost approximately $12 million to drill, which is paid up front with a long term payoff to recoup those costs. Thus, it is not practical to stop pumping oil from wells that have already been drilled. Between 2009 and 2012 the number of oil rigs increased 700%, meanwhile production increased 50%. We are seeing those investments results today in increased production,” adds Mazza.
XES is an equal-weight ETF and that methodology reduces the fund’s leverage to the industry’s largest names, XES could benefit more than its rivals if oil services mergers and acquisitions activity increases. Additionally, XES features no exposure to SeaDrill (NYSE: SDRL) and Transocean (NYSE: RIG), two of the now infamous dividend cutters from the oil services group. [A Different Type of Oil Services ETF]
There are some glimmers of hope for XES, particularly if West Texas Intermediate, the U.S. benchmark crude contract, can claw its way back above $50 per barrel after settling just under $47 on Thursday.
“The price of crude has fallen below $50 a barrel,; however, many shale fields remain profitable under a $50 price level and have a production cycle of about 18 months. So, there is a lag component to this environment of falling oil prices versus production output,” said Mazza.
SPDR Oil & Gas Equipment & Services ETF
