With oil prices rebounding last year, it was not surprising to see oil services stocks and exchange traded funds in rally mode as well.
For example, the VanEck Vectors Oil Service ETF (NYSEArca: OIH) and the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) posted 2016 gains of 27.8% and 28.4%, respectively.
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.
On Thursday, Credit Suisse upgraded several oil services providers, including some of the names found in OIH, the largest oil services ETF, and XES.
“The cyclical recovery is underway for onshore North America. It will accelerate in 2017 with higher utilization and pricing. Onshore international will begin to improve by mid-2017. Offshore remains challenged, but there are select early-cycle stocks that deserve a look,” said Credit Suisse in a note posted by Barron’s.
Rivals to OIH and XES include the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) and the PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ).
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.
Oil prices are rebounding after Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries, along with other non-OPEC producers, pledged to cut output to end the global glut that depressed crude prices for two years.
A primary reason for the recent bullishness regarding crude is the production cut announced earlier this month by the Organization of Petroleum Exporting Countries (OPEC).
OPEC plans to diminish output to a range of 32.5 to 33.0 million barrels per day from its current estimated output of 33.24 million barrels per day. While Saudi Arabia, OPEC’s biggest producer, has agreed to reduce output, Iran, Libya and Nigeria might not follow suit.
“Oilfield-services stocks are not cheap on any 2018 valuation metric. But we expect to see upward earnings revisions to start in the first quarter and continue for the next few years. This is the inverse of the past two years of downward earnings revisions, as we expect management teams to underpromise and over-deliver on pricing and utilization gains as the cycle turns,” notes Credit Suisse.
For more information on the crude oil market, visit our oil category.
