The VanEck Vectors Oil Services ETF
The VanEck Vectors Oil Services ETF (OIH) fell 3.12% in the week ended September 4. 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 exploration and production) companies.
OIH should 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 September 4, OIH gave lower returns than XOP. Please refer to the previous part of this series to find out more about XOP’s performance.
As we noted earlier, the United States Oil Fund (USO) gained ~1.34% while the United States Natural Gas Fund (UNG) fell 2.49% in the week ended September 4. These commodity ETFs track changes in prompt futures prices.
OFS companies, as their name suggests, provide equipment and services that help E&P companies extract energy, which can range from resource analyses to drilling and energy transportation equipment.
As upstream companies expand their 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 their 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.
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’s portfolio. This makes OIH not only a very industry-specific security but also highly reliant on a handful of big companies’ fortunes.
In the week ending September 4, OIH’s biggest losers included Ensco (ESV), which lost ~11.83%, and Seadrill (SDRL), which lost 10.12%. Diamond Offshore Drilling (DO) lost 9.46% in the same period. These three companies constitute ~6.6% of OIH.