A Very Bold Idea Among Energy ETFs | ETF Trends

Due in large part to the novel Coronavirus outbreak, oil prices are sagging this year, dragging energy stocks along for the ride. Oilfield services names, often highly sensitive to crude prices, haven’t been immune to that trend, but some analysts believe there could be relief on the way for some components in the VanEck Vectors Oil Services ETF (NYSEArca: OIH).

OIH seeks to replicate as closely as possible the price and yield performance of the MVIS® US Listed Oil Services 25 Index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the oil services sector. Such companies may include small- and medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

As coronavirus outbreak intensifies, a rift has grown between the partnership of Russia and the Saudi-led Organization of the Petroleum Exporting Countries. If the Saudis, Kuwait and the U.A.E. break with the Russians, the divided would further weaken the cartel’s ability to support oil prices.

While faces near-term headwinds, some analysts see value among oil services names, including some OIH holdings.

“Oilfield services stocks appear to be the most undervalued among the energy subsectors, with an average discount of 40% to our fair value estimates. Integrated oils and refining stocks are also priced attractively, with an average discount of about 30%,” said Morningstar in a recent note.

OIH Observations

The International Energy Agency has already warned that demand for oil is likely to fall 435,000 barrels per day for the current quarter year-over-year. Vitol Group, the world’s largest independent oil trader, also reduced its projected demand for the quarter to 98.3 million barrels per day, or 2.2 million barrels a day lower from its prior expectations.

Market observers are concerned that the spread of the virus will crimp global economic activity, like what has happened in China after Beijing implemented strict quarantine controls that has stopped major industrial centers.

While demand-side fears dragged on the energy market, oil prices failed to find support from a shutdown of most of Libya’s crude output and a renewed supply pact between the Organization of the Petroleum Exporting Countries and allies including Russia, a group known as OPEC+, to stabilize the oil market.

“We think oilfield services stocks are so mispriced because the market is failing to appreciate the required increase in oil and gas capital expenditures in the next several years, particularly in international markets,” according to Morningstar. “We forecast 16% cumulative growth in capital expenditures through 2023, whereas we peg the market-implied view at a meager 6%. We think the market is mistaken in assuming that international markets can copy U.S. shale’s remarkable cost-cutting. Instead, we forecast a strong 23% international expenditure recovery, driving the bulk of our forecast capital expenditure increase through 2023.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.