As crude oil prices rebound, shale hydraulic fracturing companies could increase spending on exploration and production next year, supporting further gains in energy services-related exchange traded funds.
With improved oil prices, banks are more willing to extend credit lines to leveraged hydraulic fracturing or fracking companies that are looking to boost market share for the first time in two years, reports Swetha Gopinath for Reuters.
Raymond James calculated that North America-focused oil and gas producers could raise capital investment by 30% in 2017. A number of companies, like Pioneer Natural Resources (NYSE: PXD), Diamondback Energy (NasdaqGS: FANG) and RSP Permian (NYSE: RSPP), have projected larger budgets and increased output next year.
Through the latest calculation in the value of reserves in the ground with bank creditors, 34 oil and gas producers had their available credit lines raised an average of 5%, or over $1.3 billion, with a combined credit for the companies at $30.3 billion, compared to $28.9 billion at the end of spring 2016.
“The ‘animal spirits,’ seem to be coming back to the exploration and production market, albeit slowly,” Reorg Research analyst Kyle Owusu, referring to the human emotion that drives confidence, told Reuters.
Consequently, with more robust credit lines, fracking companies are set to expand operations and increase capital spending. Consequently, the oil services industry that caters toward these producers could also reap the benefits as well.
ETF investors interested in the oil services segment have a few options available, including the VanEck Vectors Oil Service ETF (NYSEArca: OIH), SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) and the PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ).
OIH tracks the 25 largest oil services companies in the space. Both XES and IEZ track a slightly broader 37 components, but XES follows a more equal-weight indexing methodology that favors midsized companies while IEZ reflects a traditional market cap-weighted indexing methodology. Lastly, PXJ follows a fundamentally weighted index, which selects stocks based on price momentum, earnings momentum, quality, management action, and value.
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