3 Reasons to Buy Oil Stocks on the Dip

  • Oil services have been the worst-performing energy stocks over the past years

  • OIH holds a portfolio of the top oil services companies

  • Reason one- Value and dividends

  • Reason two- Multinational exposure

  • Reason three- Takeover candidates

Crude oil prices made a dramatic comeback from the April 2020 low. Last week was the first anniversary of NYMEX crude oil’s descent into a bearish abyss. On April 20, 2020, the nearby WTI futures contract fell to a low of negative $40.32 per barrel. Since NYMEX futures began trading in the 1980s, the previous all-time low came in 1998 at $10.35 per barrel. The WTI crude oil fell as those holding long positions had nowhere to store the petroleum as the nearby contract approached expiration. With storage at full capacity, longs had to sell at any price as they could not take delivery at Cushing, Oklahoma. Nearby ICE Brent futures also fell in April 2020, but the price reached a bottom at $16 per barrel, the lowest level of this century.

The price carnage in the oil market weighed heavily on the companies that provide services to the hydrocarbon sector. The VanEck Vectors Oil Services ETF product (OIH) holds a portfolio of multinational companies that support extracting fossil fuels from onshore and offshore reserves.

Oil services have been the worst-performing energy stocks over the past years

The bearish price action in the crude oil market culminated with price carnage in April 2020 caused oil services companies’ shares to tank. As producers reduced output requirements for drilling and other services evaporated. Exploration ground to a halt during the pandemic because of both the virus and the oil price.

The two leading oil services companies are Schlumberger (SLB) and Halliburton (HAL).

Source: Barchart

The long-term chart highlights at $27.05 per share at the end of last week, SLB has recovered from the March 2020 $11.87 low but remains far below its all-time high at $118.76 in 2014 when the crude oil price was above the $100 per barrel level.

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Source: Barchart

At $19.56 per share, HAL recovered from the March 2020 $4.25 share but remains a fraction of the 2014 $74.33 peak.

Oil services stocks may have recovered from last year’s bottoms, but they continue to reflect the market’s lack of demand for oil services, even though WTI and Brent crude oil prices are well above the $60 per barrel level.

OIH holds a portfolio of the top oil services companies

The VanEck Vectors Oil Services ETF product (OIH) owns a diversified portfolio of oil services companies, including SLB and HAL. The top holdings and fund summary of the ETF include:

Source: Yahoo Finance

OIH has a 36.11% exposure to SLB and HAL, with $1.243 billion in assets under management. The ETF trades an average of 519,040 shares each day and charges a 0.35% management fee.

Source: Barchart

As the chart shows, OIH reached a record high in 2008 at $1525 when NYMEX crude oil futures traded to its all-time peak at the $147.50 per barrel level. OIH made a lower high in 2014 at $1,160.20 when the oil price was above the $100 level.

While OIH is not a leveraged ETF product, it underwent a reverse split in 2020 as selling wreaked havoc in oil services shares. The ETF hit a low of $66 per share in March 2020 and recovered to the $182.63 level at the end of last week.

Crude oil has been trending higher since last April’s low. The higher the price climbs, the more the global industry will require oil services. The oil services companies are a pick-and-shovel play with the energy commodity. A continuation of higher petroleum prices should support gains in OIH. Three reasons support owning OIH as we head into May 2021.

Reason one- Value and dividends

Oil services companies offer value at their current share prices. SLB is the sector’s leader.

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Source: Yahoo Finance

Over the past four quarters, SLB’s revenues have been steady, while earnings have been trending higher.

Source: Yahoo Finance

SLB has reported profits over the past four consecutive quarters, consistently beating the consensus estimates. A survey of twenty-six analysts on Yahoo Finance has an average price target of $30.29 for SLB shares, with forecasts ranging from $16 to $36. At the $27.05 level, the company pays shareholders a $0.50 or 1.85% dividend. HAL has a similar picture.

Source: Yahoo Finance

HAL has also reported profits and beat expectations over the past four quarters. SLB and HAL reported positive earnings even during the challenging second quarter of 2020.

Source: Yahoo Finance

The trend in earnings and revenues at HAL are bullish over the past four quarters. A survey of twenty-six analysts at Yahoo Finance has an average price target of $22.62 for HAL, with forecasts ranging from $13 to $30. HAL pays its shareholders an $0.18 or 0.92% dividend at $19.56 per share.

OIH is a diversified ETF, mitigating some of the company-specific risks.

Reason two- Multinational exposure

US energy policy is now addressing climate change by reducing fossil fuel production and consumption with stricter regulations. However, traditional energy products continue to power the world. OIH’s portfolio includes a wide range of US multinational and foreign oil services companies.

Moreover, the US has handed the pricing power in the oil market back to OPEC+. After years of suffering under the weight of increasing US shale production, Saudi Arabia and Russia, the international cartel leaders, are now positioned to squeeze consumers worldwide as US output declines. Higher oil prices will open the market for future exploration and production, lifting revenues for oil services companies. The OIH should continue to trend with petroleum’s price over the coming months and years.

Source: CQG

The trend in NYMEX crude oil futures remains higher since the April 2020 low. Meanwhile, Brent crude oil is the benchmark for approximately two-thirds of the world’s producers and consumers.

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Source: CQG

Brent’s trend is also higher since the lows last April. Rising crude oil prices support the OIH ETF product.

Reason three- Takeover candidates

SLB’s market cap was at the $38.9 billion level at the end of last week, while HAL’s was at $18.092 billion. In a world where Apple (AAPL) is worth over $2.24 trillion, these companies could become attractive takeover candidates at their currency values. The following list highlights the current market caps of some of the leading US and European oil companies:

  • Exxon Mobile (XOM)- $249.524 billion

  • Chevron (CVX)- $206.110 billion

  • British Petroleum (BP)- $86.196 billion

  • Royal Dutch Shell (RDS-B)- $142.095 billion

  • Total (SE)- $119.895 billion

If any of the leading oil companies can acquire the top oil services companies in an accretive rather than dilutive purchase, it could cause a sudden boost in the sector. At the current valuations, the oil services sector could be fertile ground for consolidation and M&A activity.

Finding value in the stock market is a challenge, with many at or near all-time highs. Oil services remain an inexpensive area of the market that could make a substantial comeback if the oil price continues to rise.

SLB shares were trading at $28.59 per share on Tuesday afternoon, up $0.37 (+1.31%). Year-to-date, SLB has gained 31.58%, versus a 11.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More…

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