The Market Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services exchange traded fund is off 22% over the past year and with energy sector analysts and investors pondering rampant cost-cutting, 2016 could be another difficult year for oil services stocks.
With oil prices recently hitting 11-year lows, oil companies have been cutting back on expanding projects, which have hurt the explorers and producers space. Meanwhile, the depressed prices have weighed heavily on unconventional oil producers, like the nascent shale oil industry, which have much higher overhead costs that require higher prices to break even.
This isn’t the first time the energy sector has been forced to tighten their belts. Through 1987 to 1997, companies suffered through an extended period of lower prices and responded by cutting costs, which ensured “earnings grew strongly,” according to Bernstein research.
A growing minority of Wall Street strategists anticipate a pickup in oil prices next year and are recommending energy stocks as a way to play a rebound, reports Caroline Valetkevitch for Reuters.
In a recent Reuters poll, seven of 25 strategists cited energy as their contrarian pick for 2016 or expected a surprise upside in oil and energy next year, pointing to integrated oil companies as best situated to capitalize on the turn. [A Bottom Might be in for Energy ETFs]
“The U.S. rig count will fall by another 150 rigs over the next six months, which could cause the count to fall to 550 before shale plays begin to see an uptick in activity again, a dramatic decline that implies ‘a much uglier fundamental year than current consensus estimates,” says Raymond James by way of Seeking Alpha.
Raymond James “expects annual oilfield spending to fall 42% amid “skinny E&P cash flows and a non-existent debt market,” according to the post.
With low oil prices pressuring oil producers’ bottom line, industry experts expect capital spending on new projects to decline by 20% and 30% on average, according to Wood Mackenzie, an energy consultancy. The consultant calculated that about $220 billion in investments have been cut so far, or $20 billion more than previously estimated two months ago, after the recent price declines. Some industry analysts see the downturn lingering into next year, though it will not be as severe as what was seen in 2015.
Market Vectors Oil Service ETF
