Executive Summary
- Oil and gas equipment and services stocks have benefitted from the rising price of oil.
- Future spending on equipment and services on a per barrel basis will likely increase as oil gets harder to find and access.
- Long, leveraged and short ETFs are available:
Long Strategy: PXJ
Leveraged long: DIG
Short: DDG
Leveraged short: DUG
Investment case
Oil and gas equipment and services stocks have been on a tear since early 2007.
After a pull-back with the rest of the market in March, they once again have moved higher as the price of oil has found new highs.
The rising price of oil has encouraged expanded investment on the part of the drillers and refiners. However, as oil services giant Halliburton ponts out, the next 1 trillion barrels of oil will be:
• Harder to access
• Harder to find
• In smaller accumulations
• Heavier
• More costly
• With fewer experienced resources
• More deeply buried reservoirs
The aggressive capex spending plans of the large oil companies combined with the declining yield of legacy wells and rising complexity of pulling of oil out of the ground will mean strong demand for oil services for the forseeable future.
Overview
Oil Services ETFs provide investors a way to take a position in Oil Services with instant diversification and at a low cost.
PowerShares Dynamic Oil and Gas Services Portfolio (PXJ) tracks an index of 30 U.S. companies that assist in the production, processing and distribution of oil and gas. Managers select the companies with the greatest capital appreciation potential based on a variety of investment merit criteria including fundamental growth, stock valuation, investment timeliness and risk factors. The index is rebalanced quarterly.
Top holdings as of March 25 includeMcDermott International (NYSE:MDR), Baker Hughes (NYSE: BHI),Noble Corp (NYSE: NE) andHalliburton (NYSE: HAL).
The Dow Jones U.S. Oil Equipment & Services Index Fund(IEZ) tracks an index of companies that are suppliers of equipment or services to oil fields and offshore platforms, such as drilling, exploration, engineering, logistics, seismic information services and platform construction.
The SPDR S&P Oil & Gas Equipment & Services ETF (XES) tracks an equal weighted index of Oil & Gas Equipment & Services companies.
Leveraged and short ETFs are available from ProShares that cover exploration and production companies as well as equipment and services. The ETFs include the nearly $1 billion UltraShort Oil & Gas (DUG) as well as Short Oil & Gas (DDG) and Ultra Oil & Gas(DIG).
Top Performers
Largest Long ETF
PowerShares Oil and Gas Services Portfolio (PXJ) – $416 million
Largest Short ETF
UltraShort Oil & Gas (DUG) – $908 million
See the directory.