How To Play An Oil Services Rebound

|
Includes: HAL, NOV, OIH, SLB, SPY, USO
by: Frank Isaksen, CFA
Summary

The oil price has fallen dramatically and the oil services firms seem to have suffered more than other oil-related sectors.

To position a portfolio for a potential rebound in a sector, it sometimes makes sense to buy an ETF that is tracking the sector.

For the oil services sector, it may make more sense to pick some of the individual shares that seem to be outperforming the sector.

Summary
The oil price has fallen dramatically and the oil services firms (ETF: OIH) seems to have suffered more than other oil-related sectors. To position a portfolio for a potential rebound in a sector, it sometimes makes sense to buy an ETF that is tracking the sector. For the oil services sector, it may make more sense to pick some of the individual shares that seem to be outperforming the sector [Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB) and National Oilwell Varco (NYSE:NOV)]. John Gabriel has recently written a very informative article about the OIH and its constituents.

Oil Services Firms ETF: OIH

Top holdings in OIH.

Source YahooFinance!.

Historical performance
I have used the Portfolio Model to perform the all the below analysis. On the Portfolio tab, I have added the tickers OIH, HAL, SLB and NOV.

The below chart shows the indexed development in the OIH and a S&P 500 exchange traded fund (NYSE: SPY) the last 5 years. The oil services firms have underperformed the S&P 500 significantly.


The below chart shows the indexed development in OIH and The United States Oil ETF (NYSE: USO).

The below chart shows the OIH compared to Schlumberger. Schlumberger has outperformed the OIH.

The below chart shows the OIH compared to Halliburton. Halliburton has outperformed the OIH.

The below chart shows the OIH compared to National Oilwell Varco. National Oilwell Varco has also outperformed the OIH.

There are many plausible arguments for why this outperformance by the majors may continue also in the future. As John Gabriel mentions in his article some of the majors operate with sustainable competitive advantages thanks to their huge research and development budgets and technology-acquisition strategies.

Historical share prices and confidence analysis

On the Setup on the Portfolio Model I have selected Historical simulation as simulation method to create confidence analysis. I have chosen daily analysis and forecasting 250 trading days (about 1 calendar year). I have chosen to base the historical simulation on the last 1250 historical trading days (about 5 years).

The below chart shows the OIH price history of the last 1250 trading days (about 5 years), and the possible outcomes the next 250 trading days (about 1 year) based on the historic price changes the last 5 years.

Based on current price and the historical price changes the last 5 years the OIH is expected to be roughly between $26 and $56 in 1 year (with a 95% confidence interval). The black line from -1250 trading days to 0 shows the historic price development in OIH, and the continued black line from 0 to 250 trading days show the base case expected future price development in OIH based on the last 5 years historical price changes. The darkest blue area contains 75% of the calculated outcomes. The second darkest blue area, together with the darkest blue area, contains 90% of the calculated outcomes. The total blue area contains 95% of the calculated outcomes. 2.5% of the calculated outcomes are above the blue area and 2.5% of the calculated outcomes are below the blue area.

The below chart shows the Schlumberger price history of the last 1250 trading days (about 5 years), and the possible outcomes the next 250 trading days (about 1 year) based on the historic price changes the last 5 years.

The below chart shows the Halliburton price history of the last 1250 trading days (about 5 years), and the possible outcomes the next 250 trading days (about 1 year) based on the historic price changes the last 5 years.

The below chart shows the National Oilwell Varco price history of the last 1250 trading days (about 5 years), and the possible outcomes the next 250 trading days (about 1 year) based on the historic price changes the last 5 years.

ETF versus the top 3 holdings

In the Portfolio Model where I have already added the OIH, HAL, SLB, NOV. I now input 100 OIH in the Actual Portfolio and then as simulated trades I have input -100 OIH, 25 HAL, 15 SLB, and 20 NOV. The result is that I get calculated 2 portfolios. An Actual Portfolio that only consist of 100 OIH, and a Simulated Portfolio that consist of about equal investments in HAL, SLB, and NOV. The table below shows the 2 portfolios.

In the below charts the future possible development in these 2 portfolios have been simulated using the historical price changes the last 5 years.

The below chart shows the calculated possible equity development in the Actual Portfolio where everything is invested in OIH.

The below chart shows the calculated possible equity development in the Simulated Portfolio where everything is roughly equally invested in SLB, HAL and NOV. The Simulated Portfolio has a higher expected base case end value ($4.221) than the Actual Portfolio ($3.947). The Simulated portfolio also has a higher maximum value (about $6.100) and a higher minimum value (about $2.800) than the Actual Portfolio.

The 2 charts below shows the calculated possible accumulated profit and loss development in the Actual Portfolio and the Simulated Portfolio based on an initial investment of $3.590. These 2 charts shows the same expected outperformance by the Simulated Portfolio as the 2 charts above.

The 2 charts below shows the calculated possible portfolio equity values in 1 year on the 2 portfolios,

The distribution charts shows the distribution of portfolio equity. The horizontal axis shows the distribution of calculated equity and the vertical axis shows the calculated possibility of each outcome. The percentage shown on each bar is the accumulated probability. The first chart shows that there is an estimated 50.48% probability that the equity of the Actual Portfolio is below $3.900 in one year from now. The second chart shows that there is an estimated 45.44% probability that the equity of the Simulated Portfolio is below $4.100 in one year from now.

Conclusion

In this article I have compared investing in the exchange traded fund OIH versus creating a portfolio consisting of the top 3 holdings (SLB, HAL, NOV). In this article I have compared investing in the exchange traded fund OIH versus creating a portfolio consisting of the top 3 holdings (SLB, HAL, NOV). Historical simulation based on the last 5 years indicates that investing in the top 3 holdings may be a better alternative to participate in a possible oil services rebound than investing in the exchange traded fund OIH.

Disclosure: The author is long "HAL", "NOV". The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article represents my subjective views.