The Market Vectors Oil Service ETF (NYSEArca: OIH) climbed almost 3.8% yesterday on volume that was more than 80% above average after Schlumberger (NYSE: SLB) said it will acquire rival Cameron International (NYSE: CAM) for $12.7 billion.
While there are still concerns that Halliburton (NYSE: HAL) will not be able to complete its acquisition of rival Baker Hughes (NYSE: BHI), Wednesday’s deal-making in the oil services space predictably touched-off speculation that more oil services firms are ripe takeover candidates.
Schlumberger is OIH’s largest holding at a weight of 23.6% while Cameron International is the ETF’s fourth-largest constituent with a weight of 5.8% as of Aug. 24. Halliburton and Baker Hughes are OIH’s second- and third-largest holdings, respectively, combining for 21% of the ETF’s weight. [Problems for Energy ETFs]
“The Merrill Lynch team said that the Cameron deal puts competitors like FMC Technologies, Inc. (NYSE: FTI), Aker Solutions, Forum Energy Technologies, Inc. (NYSE: FET) and Dril-Quip, Inc. (NYSE: DRQ) into focus. It also raises questions about what National Oilwell Varco (NYSE: NOV) and Weatherford International plc (NYSE: WFT) will do,” reports Jon C. Ogg for 24/7 Wall Street.
National Oilwell Varco and Weatherford International, a combined 9.1% of OIH’s weight, have long histories of being mentioned as takeover targets. FMC Technologies garners a weight of 3.9% in OIH.
“A separate report from Robert W. Baird also put FMC Technologies, Inc. and Dril-Quip, Inc. into the merger candidate ring as two potential takeover candidates,” according to 24/7 Wall Street.
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%.
If there is a silver lining for oil services ETFs, it is twofold. First, valuations for some of the strongest names in the group are compelling. Second, those strong names, while familiar, are becoming easier to identify.
Market Vectors Oil Services ETF
