The energy sector has been at the top of investors’ mind for the last 10 months. The space was smashed by an acute sell-off in the second half of 2014 due to higher supplies and threats of lower global demand. However, glimmers of hope can be seen from this year as the space is seeing gains lately, suggesting that the commodity could be in the early stages of a recovery having been severely beaten down for so long.
In such a backdrop, investors must be ardently watching out for the earnings performance of the oil service companies so that they could take some cues and shuffle their portfolio for the best. After all, the Zacks Industry Rank for the said space is not favorable as it is in the bottom 17% section (read: Top ETF Stories of 2014 Worth Watching in 2015).
Thanks to this volatility, the sector demands extra observation during this earnings season as all eyes will be on the direction of oil flow. Let’s dig a little deeper into the earnings and see how things are shaping up for the space.
In this piece, we have considered two stocks, namely – Schlumberger Limited. (NYSE:SLB) and Halliburton Company (NYSE:HAL). Among the duo, Schlumberger reported earnings on April 16 followed by Halliburton on April 20. Results were broadly mixed with Halliburton beating on both lines and Schlumberger delivering mixed numbers.
Results in Detail
Halliburton – the second largest oil service company – came up with an earnings and revenue beat in Q1 of 2015. Earnings of $0.49 per share from continuing operations beat the Zacks Consensus Estimate of $0.41. However, the bottom line deteriorated from the first-quarter 2014 adjusted earnings of $0.73 per share.
Halliburton’s revenues of $7.1 billion reflected a year-over-year decline of 2.7% but a 1.4% beat over the Zacks Consensus Estimate. Shares were up over 2% in the key trading session following the results. Higher profitability from all the product lines in Saudi Arabia led to the beat despite the oil price carnage.
Schlumberger – the world’s largest oilfield services provider – came up with a mixed Q1 by reporting adjusted earnings of $1.06 per share (excluding special items), which edged past the Zacks Consensus Estimate of $0.96 and but fell from the year-ago number of $1.50.
However, total revenue of $10.24 billion declined 9% year over year and fell shy of the Zacks Consensus Estimate of $10.67 billion. Still, SLB has advanced about 0.6% following its results.
The space got mixed signals thanks to varied performances. Still, a bottom-line beat in both firms in this downbeat operating environment can be perceived positively. While a single stock pick is always an option to play this earnings season, we could see a deep impact on ETFs that are heavily invested in these popular oil service companies (see all the Energy Equity ETFs here).
Notably, the ETF route will help investors to mitigate one company’s average performance with the other company’s stellar results. Below, we have highlighted three oil-services ETFs with considerable allocation to SLB and HAL that could be in focus following oil-service earnings:
iShares Dow Jones US Oil Equip. (ETF) (NYSE ARCA:IEZ)
This ETF – tracking the Dow Jones U.S. Select Oil Equipment & Services Index – invests about $369 million of assets in 48 securities, focusing solely on the energy world. In-focus SLB takes the first position here with 21.1% of holdings.
Generally, when one stock accounts for as much as 21% of an ETF’s weight, its individual performance decides much of the fund’s price movement. HAL takes up the second position with about 9.6% of total assets (read: 33 Energy ETFs Leading The Oil Rally).
The fund has gained about 5.3% year to date (as of April 20, 2015) thanks to the recent energy equity sell-off. However, following the release of the earnings by the duo, IEZ has lost about 0.6% (as of April 20, 2015). IEZ is a cheaper fund, charging 0.43% for its expense ratio. The fund has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
Market Vectors Oil Services ETF (NYSE ARCA:OIH)
OIH tracks the Market Vectors US Listed Oil Services 25 Index. The index invests $1.3 billion of assets in 26 holdings. OIH devotes as much as 20.09% of the portfolio weight to SLB, followed by 11.4% in HAL. OIH is cheap in the space with an expense ratio of 0.35% (read: Oil Services ETFs Head-to-Head: XES vs. OIH).
The fund is up about 4% so far this year (as of April 20, 2015) but has returned more than 1% since April 16. OIH has a Zacks ETF Rank #5 with a High risk outlook.
PowerShares Dynamic Oil & Gas Serv (ETF) (NYSE ARCA:PXJ)
This product offers exposure to 30 energy stocks with SLB and HAL at the first and third positions, respectively, allocating more than 5% of total assets to each. PXJ tracks the Dynamic Oil & Gas Services Intellidex Index and has amassed about $69 million thus far. The ETF charges 61 bps in fees. So it is slightly expensive than some of its counterparts.
The fund has lost about 1.8% following the earnings release of the two companies, but has gained over 3% year to date. PXJ has a Zacks ETF Rank #5 with a High risk outlook.