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What Went Wrong With Oil Services ETFs in May?

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May has been deadly for oil services stocks and ETFs. Oil prices treaded lower in the month with United States Oil Fund LP (USO - Free Report) losing about 11% on US-China trade worries and higher inventory build-up. But the pain for oil services stocks was greater than the actual commodity (read: Oil Likely to See Steepest Weekly Fall: Inverse ETFs to Profit).

Among several subsectors, equipment and services ETFs suffered the most. Investors should note that SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) has lost 18.2% in the past month while SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) is off 12.7% and VanEck Vectors Oil Refiners ETF (CRAK - Free Report) has lost only 7.9%.

Oil services stocks come from a bottom-ranked industry (bottom 44%). Let’s find out what are the factors working against equipment and services ETFs.

Inside the Pain

The S&P downgraded Halliburton (HAL - Free Report) and Schlumberger (SLB - Free Report) in late May. The news dealt a blow to oil service stocks. "Oilfield services companies will no longer be able to generate the high operating margins they did in 2014," S&P analyst Carin Dehne-Kiley said in the note.

Also, Baker Hughes’ data for the week ended May 24 showed that rig count has declined for seven weeks in a row. Market watchers are of the view that “shale producers are cutting back in a bid to conserve capital.”

Less capital expenditure among exploration & production (E&P) companiesmeans “less drilling and fracking work for top oilfield services providers.” Trade war also hampered the global growth outlook as well as demand for energy. This along with ample supplies may have tempted E&P companies to limit production growth.

As a result, Invesco S&P SmallCap Energy ETF (PSCE - Free Report) (down 18.2%), VanEck Vectors Oil Services ETF (OIH - Free Report) (down 16.7%), iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) (down 16%) and Invesco Dynamic Oil & Gas Services ETF (PXJ - Free Report) (down 15.1%) suffered badly in the month (read: Top and Flop ETFs of May).

Any Hope Ahead?

Oil service companies seem optimistic despite a tumultuous start to 2019. After four years of major pricing concessions, Schlumberger plans to recover its international service and product pricing this year. It also seeks to gain efficiency by increasing activity levels, with little to no spare equipment capacity, per an analyst.

Baker Hughes, a GE company — 60% of its oilfield service revenues come from outside North America — expects strengthening international markets to drive its overall business positively, per that analyst.

Halliburton — which confirmed lower drilling and completion spending among U.S. E&P companies —  generates about 43% of its revenues from international markets. The percentage is expected to shoot higher throughout the year as international spend is on the rise.

Against this backdrop, we can conclude that even if medium-term potential could be decent for the space, the short term looks murky. The oil services ETFs like PXJ, IEZ, XES have a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong-Sell) while OIH has a Zacks Rank #3 (Hold).

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