With oil prices and energy equities sagging to start 2017, it is not surprising that the oil services industry, a group often highly correlated to oil prices, is following suite.
For example, the VanEck Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services exchange traded fund, is lower by 7.1% year-to-date.
However, some analysts are warming to the idea of the oil services rebounding. Rivals to OIH include the 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.
“In a new research report, the team at Deutsche Bank feels we could be in the early stages of a multiyear capital expenditure downcycle, which can be longer than stock market cycles. While that may seem negative, the positive news is the good companies can outperform even in down cycles,” reports Lee Jackson for 24/7 Wall Street.
Shale hydraulic fracturing companies could increase spending on exploration and production this 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.
Deutsche Bank has a buy rating on Halliburton (NYSE: HAL), the second-largest oilfield services behind Schlumberger (NYSE: SLB). The two are the two largest holdings in OIH, combining for 34% of the ETF’s weight.
“For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows. Halliburton shareholders receive a 1.4% dividend. The Deutsche Bank price target for the stock is $66. The Wall Street consensus target is $64.26, and shares closed Wednesday at $51.54,” according to 24/7 Wall Street.
For more information on the energy sector, visit our energy category.