The VanEck Vectors Oil Services ETF
The VanEck Vectors Oil Services ETF (OIH) lost 3.86% in the week ended July 2. The ETF tracks an index of the top 25 US-listed oilfield equipment and services (or OFS) 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 companies.
It would then follow that OIH would mirror the performance of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks an index of predominantly upstream E&P (exploration and production) companies. In the week ended July 2, XOP lost 6.2%. OIH, however, fell less than XOP at the end of the week, as we can see in the chart above. Refer to the previous part to find out more about XOP’s performance.
As we noted earlier, the United States Oil Fund (USO) lost ~5.3%, while the United States Natural Gas Fund (UNG) gained 1.8% in the week ended July 2. 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, which 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, which includes companies like Magellan Midstream Partners (MMP).
OIH tracks a capitalization-weighted index. So, like we saw with XLE in part one of this series, OIH too can be prone to dominance by a handful of large companies. Industry leaders Schlumberger (SLB) and Halliburton (HAL) together account for almost a third of OIH’s holdings. SLB lost 3% while HAL and BHI both lost more than 2% in the July 2 week.
Indeed, just the top five holdings, including Baker Hughes (BHI), National Oilwell Varco (NOV), and Cameron International (CAM), together with SLB and HAL, account for about half of OIH. This makes OIH not only a very industry-specific security, but also one very reliant on the fortunes of a handful of big companies.