The VanEck Vectors Oil Services ETF (OIH) came in flat in the week ending September 18, 2014, compared to the week ending September 11. This ETF tracks an index of the top 25 US-listed OFS (oilfield equipment and services) companies.
OIH is a good proxy for playing energy prices because OFS companies’ fortunes tend to be closely linked to those of upstream E&P (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 companies.
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.
In the week ending September 18, OIH gave better returns than XOP.
Another sector that benefits when upstream companies expand their operations is the MLP (master limited partnership) sector, which includes companies like Magellan Midstream Partners (MMP).
As we noted earlier, the United States Oil ETF (USO) fell by 0.2%, while the United States Natural Gas ETF (UNG) fell by 3.29% in the week ending September 18. These commodity ETFs track changes in prompt futures prices.
In the comparable group of securities we’ve been discussing in this series, OIH fared the best. XOP fared the worst among these securities in the week ending September 18. Among the commodity ETFs we’ve been discussing in this series, UNG fared the worst.
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.
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 like 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 18, OIH’s biggest losers included Weatherford International (WFT), which fell by 13.11%, and Diamond Offshore Drilling (DO), which fell by 8.59%. National Oilwell Varco (NOV) fell by 3.39% in the same period. These three companies together constitute ~10.23% of OIH.