With oil prices rebounding, some oil services stocks and exchange traded funds are joining in. The United States Oil Fund (NYSEArca: USO) has risen 17.2% over the past month, propelling the Market Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services ETF, to a 12.1% gain over the same period.
With analysts having taken the knife to profit and revenue forecasts, the recent appreciation by oil services ETFs could be a sign the group has bottomed and is poised for further upside. However, recent performance by oil services does not guarantee a bump-free ride going forward. [Worst may be Over for the Oil Services ETF]
“Capital spending by upstream players is now in the early stages of a major pullback after years of steady increases. Collectively, the upstream names in S&P Capital IQ’s STARS coverage universe are expected to spend about 30% less in 2015 for capital projects, based on S&P Capital IQ consensus estimates as of late March 2015. Looking ahead to 2016, total capex for this group of companies is expected to rise a modest 3%,” said S&P Capital IQ in a new research note.
Investors should keep in mind that the oil services sector is heavily reliant on capital spending cycles in the energy industry. The recent sharp cuts in capital expenditure budgets in 2015 contributed to the pullback in oil services – U.S. companies are expected to spend about 20% less than the average over 2014, with some cutting expenditures by around 50%.
Even with the negative spending outlook, the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), a $263 million equal-weight ETF, has performe in-line with OIH over the past month. Still, investors should be cautious on some of XES’s 45 holdings.
For example, S&P Capital IQ has strong sell ratings on Diamond Offshore (NYSE: DO); which cut its dividend, Nabors Industries (NYSE: NBR), Patterson-UTI Energy (NasdaqGS: PTEN), as well as two companies in the oil & gas equipment & services sub-industry – Basic Energy Services (NYSE: BAS) and Superior Energy Services (NYSE: SPN).[Momentum for an Oil Services ETF]
Nabors and Patterson-UTI are top 10 holdings in the XES four of the aforementioned stocks, excluding Basic Energy Services, combine for 10.3% of the ETF’s weight.
“In the case of the energy equipment & services industry, first-quarter 2015 forward EV/EBITDA valuation was about 8% above the average since 2009, which we think suggests that stock prices have retreated by relatively less than EBITDA estimates have declined. Meanwhile, in the case of the broader energy sector, first-quarter 2015 forward EV/EBITDA valuation was about 48% above the average since 2009, which we think points to EBITDA estimates being slashed by a far greater degree than stock prices,” according to S&P Capital IQ.
SPDR Oil & Gas Equipment & Services ETF
