Why Rising Oil Prices Should Boost Oil Services Companies

Why Rising Oil Prices Should Boost Oil Services Companies


May. 31 2018, Updated 4:00 p.m. ET


Oil Services Equities

Research conducted here at VanEck has identified that oil price and the S&P 500 Index can be used to explain most of the performance of oil services stocks historically. Using these variables to generate an expected return for oil services stocks, we can look at the difference between this and the actual return of oil services stocks. Right now, based on these variables, oil services stocks are trading at a substantial discount, and the chart below shows that oil services stocks haven’t been this cheap since 2001.

The model remains bullish on oil services stocks. Key bullish indicators include strong oil prices, reasonable volatility in oil services equities, and strong demand for natural gas. The chart below shows that oil prices are up 14.83% this year through April.

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Ray of hope for oil services companies

From lows of around $26 per barrel in 2016, oil prices (FRAK) have rebounded to the current level of around $70 per barrel. According to FactSet, average oil prices in the first quarter of 2018 were 21.5% higher than in the first quarter of 2017. Higher oil prices are mainly due to rising global demand and supply cuts from OPEC.

Rising crude prices increase demand for oil services companies (XES). There’s a rush to drill new wells in the Permian Basin of West Texas and New Mexico and the Bakken Shale of North Dakota. While drillers are looking to recruit more workers, others are investing in high-end technologies. For example, Noble (NE) and General Electric (GE) recently announced plans for a fully digitized drilling vessel.

Healthy outlook

With signs of recovery in the sector, international oil companies are reporting an increase in earnings. At the end of 2017, the returns on capital of international oil companies reached their highest level since 2014. The outlook for 2018 and 2019 looks even better, as oil prices are expected to remain elevated for the next few years. The increased activity is likely to filter down to the service providers.

The VanEck Vectors Oil Services ETF (OIH), which tracks the performance of US-listed oil services companies, is up 4.2% year-to-date as of April 30, compared to a 1% loss for the S&P 500 Index.


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