As has been widely cited, oil prices are tumbling and the energy sector is the worst-performing group in the S&P 500 this year. Not surprisingly, oil services stocks and exchange traded funds, assets that are often highly correlated to oil prices, are stumbling.
For example, the VanEck Vectors Oil Service ETF (NYSEArca: OIH), the largest oil services ETF and a fund that is heavily allocated to the industry’s biggest names due to its cap-weighted methodology, is down almost 18% year-to-date. That decline is nearly double that of the largest energy ETF. The SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), an equal-weight spin on oil equipment and services stocks, has been even worse with a loss of over 22%.
Other oil services ETFs include the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) and the PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ). Those two ETFs are down an average of 18%.
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.
Past carnage in the oil services sector could become a benefit going forward as some of the industry’s weaker hands have disappeared.
“Over the past 3 years plus, the makeup of the indexes have changed substantially. Gone are many weaker companies that could not withstand the oil and gas downturn. Included are the survivors and a few newcomers that are generally well capitalized,” according to a Seeking Alpha analysis of the oil services ETFs. “A great deal of companies have gone bankrupt, are now nano-caps or micro-caps that don’t qualify for index membership, have been merged to survive or taken over outright. Comparing 2014 and 2015 form N-Q Schedules of Holdings for the three ETFs to today’s holdings demonstrates the huge recent turnover in the baskets.”
If crude oil prices rebound, shale hydraulic fracturing companies could increase spending on exploration and production this year, supporting further gains in energy services-related ETFs.
“Many companies have gone through bankruptcy, some emerging, some not. Many others lost over 90% of their market cap at the nadir of the oil and gas selloff and are not likely to ever fully rebound,” notes Seeking Alpha. “There is far less competition in the space now, so if oil and gas production continues to pick up, many of these companies could do very well intermediate term.”
For more information on the crude oil market, visit our oil category.