The VanEck Vectors Oil Services ETF (NYSEArca: OIH), the largest oil services exchange traded fund, surged in the first quarter and with oil prices rallying to start the second quarter, the fund is now higher by 26.51% year-to-date.
While OIH’s surge to start 2019 may give some investors pause about jumping into the fund at current levels, some analysts believe oil services stocks can still notch upside from here.
Earlier this year, OPEC issued a list of oil production cuts by its members and other major producers for the next six months starting January 1 to bolster confidence in the global crude oil markets as the cartel and its allies move to cut supply to combat the global glut, Reuters reports.
“Amid the backdrop of cuts from OPEC, U.S. shale producers have dialed back somewhat as well due to falling oil prices, but rig counts in the major U.S. shale basins have not declined dramatically, and many U.S. producers say they expect continued growth in 2019,” said Morningstar in a recent note. “We think the most recent round of OPEC cuts only nudges the door open for shale producers to increase production and keep taking share from OPEC and its partners.”
OIH ETF Drivers
Furthermore, the oil services sector gained momentum after Schlumberger (NYSE: SLB), a bellwether for the oilfield services industry, revealed quarterly revenue that topped expectations and forecasted single-digit growth in international markets for 2019, Reuters reports.
Schlumberger and Halliburton Co. (NYSE: HAL) combine for over 35% of OIH’s weight.
“Schlumberger stands out as high-quality and favorably valued,” said Morningstar. “The market seems to be underrating prospects for the SPM business, a fully integrated services model that aspires to deliver a sea change in oil and gas development costs. SPM is already delivering returns on capital far ahead of the rest of the company, and therefore the business will lift Schlumberger’s profitability up as it grows as a share of revenue in years to come.”
Schlumberger is OIH’s largest holding. Morningstar has a four-star rating and a fair value estimate of $62 on Schlumberger.
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