The VanEck Vectors Oil Services ETF
The VanEck Vectors Oil Services ETF (OIH) lost 1.63% in the week ended August 7. This 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 (exploration and production), 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 companies. In the week ended August 7, XOP lost 2.97%. OIH, however, fell less than XOP at the end of the week, as we can see in the chart above. Please refer to the previous part to find out more about XOP’s performance.
As we noted earlier, the United States Oil Fund (USO) lost ~6.61%, while the United States Natural Gas Fund (UNG) gained 2.84% in the week ended August 7. 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 sector, which includes companies like Magellan Midstream Partners (MMP).
OIH tracks a capitalization-weighted index. As we saw with XLE in Part 1 of this series, OIH can also 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 just 0.68% while HAL and BHI both lost more than 4% in the week ending August 7.
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 that is highly reliant on the fortunes of a handful of big companies.