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Energy ETFs Surge on Q3 Oil Service Earnings Beats

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The energy sector has been performing remarkably well this year on higher oil prices and overseas operations. This trend is expected to continue as we move towards the end of the year. In fact, as per the Zacks Estimates, the energy sector is poised to rank third in Q3 for earnings, after only finance and technology (read: 3 Country ETFs to Buy on an Oil Surge).
This solid earnings output should be easy to hit too, in particular after robust Q3 numbers from two energy giants – Schlumberger (SLB - Free Report) and Baker Hughes – on October 18th. Increased oilfield activity offshore U.S. and overseas boosted the profits of these companies.
Oil Service Earnings in Focus
Schlumberger, the world’s largest oilfield services provider, reported earnings of $1.24 per share that topped the Zacks Consensus Estimate by a nickel and improved from the year-ago quarter as well. Higher offshore drilling activity in North America, strong demand from the Middle East and Asia, and a seasonal rebound in Canadian drilling led to the strong performance. 
Revenues climbed 11% to record $10.5 billion and were in-line with our consensus estimate.
Meanwhile, Baker Hughes, the world’s third largest oilfield services provider, surpassed the Zacks Consensus Estimate on both earnings and revenues thanks to strong performances in the Middle East/Asia-Pacific and Europe/Africa/Russia Caspian business units.
The company’s earnings of 81 cents per share increased 2.5% year over year and beat our estimate by 3 cents. Revenues rose 8.1% to $5.79 billion and outpaced our estimate of $5.74 billion.
Following the earnings beat, BHI led the gains in the energy sector, climbing 7.28% at the close on elevated volume after rising as much as 8% in early trading hours. The shares of SLB rose 3.8% in early trading hours but closed a little lower, with a 2.8% rise, on moderate volume (read: 3 Top Performing Energy ETFs in Focus Now).
ETF Impact
This solid run was also felt in the ETF world, with energy ETFs surging. Many of the key funds in this segment have a double-digit allocation to these two oilfield service providers and gained in the day’s session.
Below, we have highlighted three ETFs with the biggest allocations to these two energy bellwethers that have seen higher trading and look to be big movers this week and in the next. Investors should closely monitor the movement in these funds and could catch the opportunity from any further surge in stock prices (see: all the Energy ETFs here).
Market Vectors Oil Services ETF (OIH - Free Report)
This is by far the largest and the most popular ETF in the energy space with AUM of over $1.7 billion and average daily volume of about 3.5 million shares. The fund provides exposure to the 26 most liquid firms by tracking the Market Vectors US Listed Oil Services 25 Index. The ETF charges a fee of 35 bps annually.
Schlumberger occupies the top position in the basket with 20.65% of assets while Baker Hughes takes the fourth spot at nearly 5% after Halliburton (HAL) and National Oilwell (NOV). Apart from the U.S. companies, the fund also provides exposure to Switzerland, Bermuda, Luxemberg, United Kingdom and the Netherlands (read: Switzerland ETFs: Safest Play in Europe?).
The fund gained 2.03% on the day and is up nearly 30% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or ‘Hold’ with a ‘High’ risk outlook.
iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report)
This fund follows the Dow Jones U.S. Select Oil Equipment & Services Index, holding 50 securities in its basket. The product has amassed $474.9 million in its asset base and trades in good volume of more than 89,000 shares per day. The ETF charges 45 bps in annual fees from investors.
Here too, SLB takes the top spot making up roughly 21.57% of the assets while holding less than 9.7% of assets. This suggests that the fund is highly dependent on SLB’s performance. BHI occupies the fourth position at 5.61%.
The fund returned about 32% so far this year and added 2.15% on the day.
PowerShares Dynamic Oil & Gas Services Fund (PXJ - Free Report)
This product offers exposure only to seven energy stocks with BHI at the top position, allocating 17.04% of total assets. PXJ is an active choice in the energy space and provides an option to pure play with upbeat Baker Hughes earnings and its impressive surge in share price (read: A Comprehensive Guide to Oil & Gas ETFs).
The fund tracks the Dynamic Oil Services Intellidex index, which evaluates companies on a host of investment criteria including growth, valuation, timeliness and risk factors. The ETF is less popular having amassed $120.2 million in its asset base and less liquid with average daily volume of 45,000 shares a day.
The product has an expense ratio of 0.62% and added 2.01% on the day. The ETF is up nearly 30% so far this year. The fund currently has a Zacks ETF Rank of 4 or ‘Sell’ with a ‘High’ risk outlook.
Bottom Line
The stellar performance by Schlumberger and Baker Hughes last week signals that the energy sector will continue to give strong performances in the months ahead. Rising U.S. oil demand, greater energy conservation and increasing offshore drilling would fuel further growth.
Further, with the earnings releases from other energy companies (Halliburton (HAL), Chevron (CVX) and Exxon Mobil (XOM) pending, it is difficult to conclusively speak on the sector’s Q3 performance, though it is clearly off to a good start.
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