4 ETFs to Trade the Oil Services Rally

The surge in oil service industry stocks has continued, despite early July typically being a seasonally soft period.  

The four ETFs that focus on the sector—the VanEck Oil Services ETF (OIH), the iShares U.S. Oil Equipment & Services ETF (IEZ), the SPDR S&P Oil & Gas Equipment & Services ETF (XES) and the Invesco Dynamic Oil & Gas Services ETF (PXJ)—have seen a remarkable stealth rally over the past three weeks, up 18.43% to 23.86%, versus the S&P 500’s 4.08%.   

A Baker Hughes report that showed a brisk uptick of six additional rigs in the Bakken, breaking a nine-week slump, probably pumped prices up. Also, the International Energy Agency report that forecast a tight oil market globally until 2024 helped traders’ confidence.  

Two other big factors include the strong demand the sector is seeing for new rigs and advanced equipment by international oil producers this year, and a profit-taking rotation out of tech.  

East Asian and Latin American rig counts are up 13% this year. And in the Middle East, a far bigger market, the percentage is a respectable 6%-7%, despite the recent Saudi cuts. And with the Invesco QQQ Trust (QQQ) now facing the Nasdaq’s historic rebalance, portfolio managers might start to shift out of tech to other sectors.  

Is this anomalous rally the start of something big? We will know soon. This is a very concentrated segment that is presently undervalued by most metrics, so if it starts to run, it will move fast.  

Oil Services’ ‘Magnificent Seven’ 

All four of the oil service ETFs—OIH, XES, IEZ, PXJ—are heavily weighted in just a few holdings. OIH has only 26 tickers, and XES maxes out with 34.  

It is important to recognize that each one has a slightly different way of approaching the sector. OIH and IEZ lean into the top three or four names, while XES and PXJ offer a more balanced portfolio that captures the potential of the small innovators.  

With an expense ratio of 0.35% and $2.41 billion in assets under management, OIH is by far the largest fund for the segment. It swings for the fences, with nearly 40% of the portfolio in its top three—Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. Likewise, IEZ has 43% of its top three, with Transocean taking the third slot instead of Baker Hughes.  

These four megacaps are, of course, well-known. Like tech’s Magnificent Seven, they are “best of breed” firms that are surprisingly nimble for their size.  

One major holding in all four ETFs that many investors might not recognize is ChampionX Corp., a recent merger of well automation provider Apergy Corp. and a carve-out of Ecolab Inc.’s oil well chemicals segment. One salient aspect of this ticker is that because the merger was structured as a “reverse Morris trust” in early 2020, a legal process that kept the new entity from outside purchase for three years, the company becomes a likely acquisition target this fall.  

In contrast to OIH and IEZ, XES tracks its own equal-weighted index, which provides wider exposure but drops the average market cap of its holdings to $8.5 billion. These firms are undervalued by measures like price-to-earnings, forward price-to-earnings growth, enterprise value-to-sales forward PEG and EV/sales—especially since the market has pursued other sectors for nearly a year. 

Of the four funds, PXJ’s mandate is the most unique—it is neither market-cap-driven nor an equal-weight strategy. Instead, the ETF sorts the relevant firms into two categories—essentially the big guys and the little guys. The larger companies are afforded 40% of the weight, while smaller outfits get the remaining 60% of the total.  

This allows investors to get exposure to firms like pressure control provider Cactus Inc., which has seen 57% year-over-year revenue growth, or Weatherford International, a firm that is up 334% in one year, and was just awarded a five-year contract for intervention services by Petroleo Brasileiro SA. 

Oil Well Intervention 

The “end of oil” heralded by the EV revolution may not come to pass as quickly as predicted, but it has made the major U.S. oil companies more cautious about big spending on new wells.  

In contrast, according to Rystad Energy, oil companies this year will spend $58 billion on well intervention, which is a way to extract more from existing wells instead of drilling new ones. The firm believes this is just the start of a surge in the coming decade as the focus on efficiency intensifies. It expects intervention awaits about 260,000 wells by 2027, 17% of all wells globally. 

There are many types of intervention—from pumping to coil tubing to snubbing—and the oil services industry is where the big producers must go for this technology.  

Investors looking for a relatively cheap sector with room to run should consider the oil services ETFs.