Smaller hydraulic fracturing companies, along with related exchange traded fund, are having a harder time coping with the cheap oil prices than their larger, cash-rich oil services competitors.
Over the past three months, the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes North American hydraulic fracturing companies, has increased 5.1% while the Market Vectors Oil Service ETF (NYSEArca: OIH), which tracks the largest oil services companies, rose 14.1%. [Energy ETFs: Drillers Can Shoot Their Own Feet If Not Careful]
Small- and mid-sized firms that make up at least half of the nearly $100 billion per year U.S. oil services industry that provides fracking sand and specialized materials for fracking have been hit the hardest, reports Edward McAllister for Reuters.
Without high oil prices to sustain them, many smaller companies were forced to close down or see costs outpace profits, with many struggling to meet loan payments and approaching bankruptcy.
West Texas Crude oil futures were hovering around $60 per barrel. Goldman Sachs calculated that the breakeven cost of shale is about $60 per barrel, according to Reuters.
The weakness in the smaller segment of the energy sector may have contributed to FRAK’s more tepid bounce back over recent months. FRAK has larger weights in smaller companies, including micro-caps 1.0%, small-cap 8.2% and mid-caps 30.2%.
Meanwhile, larger companies, like Halliburton (NYSE: HAL), Baker Hughes (NYSE: BHI) and Schlumberger (NYSE: SLB), are waiting out the current oil downturn by cutting thousands of jobs and tightening their belts. OIH includes large tilts toward these companies, including SLB 20.2%, HAL 11.0% and BHI 7.1%.