VanEck Vectors Oil Services ETF
The VanEck Vectors Oil Services ETF (OIH) fell 3.6% in the week ending June 19. The ETF tracks an index of the top 25 US listed OFS (oilfield service) companies. OIH is a good proxy for playing energy prices because OFS companies’ fortunes tend to be closely linked to those of upstream or E&P (energy and production) companies.
It would then follow that OIH would mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP tracks an index of predominantly upstream E&P companies. Last week, XOP fell 2%—see the above graph. So, OIH fell more than XOP at the end of the week. Refer to the previous part of this series to learn more about XOP’s performance last week.
As we noted earlier, the United States Oil Fund (USO) fell 1.23%, while the United States Natural Gas Fund (UNG) rose ~2% in the week ending June 19. These commodity ETFs track changes in prompt futures prices.
OFS companies, as the name suggests, provide equipment and services that help E&P companies extract energy. These can range from resource analyses even before a well is drilled, to the equipment used for drilling and energy transport.
As upstream companies expand operations, OFS companies stand to gain. The opposite is also true. So, even though OFS companies tend to have longer-term contracts with upstream companies, any strength or weakness in upstream stocks quickly flows to OFS stocks. Another sector that benefits when upstream companies expand operations is the MLP (master limited partnership) sector. It includes companies like Targa Resources Partners (NGLS).
OIH tracks a capitalization-weighted index. So, like we saw with XLE in Part 1, OIH can also be prone to dominance by a handful of large companies. Together, industry leaders Schlumberger (SLB) and Halliburton (HAL) account for almost a third of OIH’s holdings.
Indeed, just the top five holdings—including Baker Hughes (BHI), National Oilwell Varco (NOV), and Cameron International (CAM)—together with Schlumberger and Halliburton, account for about half of OIH. This makes OIH not only a very industry-specific security, but also very reliant on the fortunes of a handful of big companies.