Energy stocks are lagging once again in 2015 and oil services names are not exceptions. The Market Vectors Oil Service ETF (NYSEArca: OIH), which tracks the largest oil services companies, is off 7.5% year-to-date, roughly the same incurred by the Energy Select Sector SPDR (NYSEArca: XLE).
S&P Capital IQ recently pared its rating on the energy sector, the seventh-largest sector weight in the S&P 500, to underweight from marketweight, citing supply issues and rising inventories, among other factors. Even before the plunge in oil prices, large oil producers were experiencing lower returns on capital and some were struggling to meet investment and dividend demands. [Problems for Energy ETFs]
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%.
However, some analysts see rebound potential with some oil services names, including some of OIH’s marquee holdings.
In a recent research note, Deutsche Bank had bullish comments on Schlumberger (NYSE: SLB), the largest oilfield services provider, among others.
“The deterioration in income and margin resulted from the company’s poor showing in North American land activity. With drilling picking up, and domestic rigs expected to be added this year and next, the prospects for the company look outstanding,” according to a Deutsche note cited by Lee Jackson of 24/7 Wall Street.