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What Went Wrong With Oil Services ETFs in May?

Sanghamitra Saha

May has been deadly for oil services stocks and ETFs. Oil prices treaded lower in the month with United States Oil Fund LP USO losing about 11% on US-China trade worries and higher inventory build-up. But the pain for oil services stocks was greater than the actual commodity (read: Oil Likely to See Steepest Weekly Fall: Inverse ETFs to Profit).

Among several subsectors, equipment and services ETFs suffered the most. Investors should note that SPDR S&P Oil & Gas Equipment & Services ETF XES has lost 18.2% in the past month while SPDR S&P Oil & Gas Exploration & Production ETF XOP is off 12.7% and VanEck Vectors Oil Refiners ETF CRAK has lost only 7.9%.

Oil services stocks come from a bottom-ranked industry (bottom 44%). Let’s find out what are the factors working against equipment and services ETFs.

Inside the Pain

The S&P downgraded Halliburton HAL and Schlumberger SLB in late May. The news dealt a blow to oil service stocks. "Oilfield services companies will no longer be able to generate the high operating margins they did in 2014," S&P analyst Carin Dehne-Kiley said in the note.

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Also, Baker Hughes’ data for the week ended May 24 showed that rig count has declined for seven weeks in a row. Market watchers are of the view that “shale producers are cutting back in a bid to conserve capital.”

Less capital expenditure among exploration & production (E&P) companiesmeans “less drilling and fracking work for top oilfield services providers.” Trade war also hampered the global growth outlook as well as demand for energy. This along with ample supplies may have tempted E&P companies to limit production growth.

As a result, Invesco S&P SmallCap Energy ETF PSCE (down 18.2%), VanEck Vectors Oil Services ETF OIH (down 16.7%), iShares U.S. Oil Equipment & Services ETF IEZ (down 16%) and Invesco Dynamic Oil & Gas Services ETF PXJ (down 15.1%) suffered badly in the month (read: Top and Flop ETFs of May).

Any Hope Ahead?

Oil service companies seem optimistic despite a tumultuous start to 2019. After four years of major pricing concessions, Schlumberger plans to recover its international service and product pricing this year. It also seeks to gain efficiency by increasing activity levels, with little to no spare equipment capacity, per an analyst.

Baker Hughes, a GE company BHGE — 60% of its oilfield service revenues come from outside North America — expects strengthening international markets to drive its overall business positively, per that analyst.

Halliburton — which confirmed lower drilling and completion spending among U.S. E&P companies —  generates about 43% of its revenues from international markets. The percentage is expected to shoot higher throughout the year as international spend is on the rise.

Against this backdrop, we can conclude that even if medium-term potential could be decent for the space, the short term looks murky. The oil services ETFs like PXJ, IEZ, XES have a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong-Sell) while OIH has a Zacks Rank #3 (Hold).

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iShares U.S. Oil Equipment & Services ETF (IEZ): ETF Research Reports
 
SPDR S&P Oil & Gas Equipment & Services ETF (XES): ETF Research Reports
 
Invesco Dynamic Oil & Gas Services ETF (PXJ): ETF Research Reports
 
Invesco S&P SmallCap Energy ETF (PSCE): ETF Research Reports
 
VanEck Vectors Oil Services ETF (OIH): ETF Research Reports
 
US Commodity Funds United States Oil Fund (USO): ETF Research Reports
 
SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
 
VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
 
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Zacks Investment Research
 
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