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OIH: Things Will Get Worse Before They Get Better

May 03, 2020 5:52 PM ETVanEck Oil Services ETF (OIH)2 Comments
Sarfaraz A. Khan profile picture
Sarfaraz A. Khan


  • The VanEck Vectors Oil Services ETF is the largest oilfield services fund that gives investors exposure to 25 of the biggest OFS companies.
  • The US oil and gas producers have already made major spending cuts and will likely announce even bigger reductions in CapEx and drilling activity during the ongoing earnings season.
  • The capital investments and drilling activity in the international markets will also decline as even some of the biggest and most well-established companies like Saudi Aramco cut spending.
  • A 20% to 40% drop in global upstream CapEx could translate into $109 billion to $218 billion cut in spending which represents a major income hit to OIH's holdings.

The VanEck Vectors Oil Services ETF (NYSEARCA:OIH), which is the benchmark fund for the oilfield services industry, was already looking at a mixed outlook entering into 2020, and it has gotten much worse now. The historic drop in oil prices may force oil and gas producers around the world to cut capital investments by more than $100 billion this year, which will hurt the future revenues of oilfield service providers. The ETF will likely remain subdued as the earnings of its underlying holdings come under pressure.

Image courtesy of Pixabay

The oilfield service providers struggled with weak levels of earnings and cash flows in 2019 as their customers - the exploration and production companies - kept a tight lid on their capital expenditures. The US oil and rig count fell from 1,075 units at the start of 2019 to 805 rigs by the end of the year, data from Baker Hughes (BKR) shows, as drilling activity remained weak. The VanEck Vectors Oil Services ETF, the industry's largest fund in terms of assets under management, fell by ~15% in this period as shares of most oilfield service providers came under pressure. In early-2020, the industry's outlook was looking largely mixed, as I discussed previously. The North American market was expected to remain weak, but we were beginning to see signs of life in the international markets. But now, following the unprecedented drop in oil prices, the oilfield services industry is looking at a grim future.

With more than $340 million of assets under management and daily trading volumes of almost 700,000 shares ($69.8Mn), the VanEck Vectors Oil Services ETF is the largest and most liquid fund focusing on the oilfield services industry. By comparison, its closest peers SPDR S&P Oil & Gas Equipment & Services ETF (XES), iShares

This article was written by

Sarfaraz A. Khan profile picture
Hey there, I'm Sarfaraz A. Khan - a seasoned financial writer and investor with a passion for uncovering hidden gems. I have a deep understanding of fundamental analysis and I specialize in writing about mid-cap and small-cap companies that are poised for significant growth. My investment philosophy is heavily influenced by the strategies of legendary investors like Warren Buffett and Benjamin Graham. I look for investment opportunities in companies that have strong fundamentals and can grow substantially over the long-term. I'm not afraid to venture into other areas of the market either. While I primarily write about mid and small-cap stocks, I also delve into ETFs and economic trends occasionally. I always aim to provide a balanced view and discuss risk factors in my articles so investors can make better decisions. Although I've been away from Seeking Alpha for a while, I'm excited to get back to writing and sharing my expertise with the community. Moving forward, you can expect to see two to three articles a week from me. When I'm not analyzing stocks or writing about finance, I enjoy reading about history, religion, science, economy, and following the latest developments in the energy and technology sectors.

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Comments (2)

Once the US oil industry is wiped out the Russians and Saudis will teach you what you gave up was more important than you ever thought. $$$$$ the new oil price is..what they tell you it is...
rodolfoavalos1 profile picture
Wouldn’t the OFS companies already be pricing the worst of the worst ? They got a decent bounce though, but this might stabilize sooner than we all expect.
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