Friday’s ETF To Watch: iShares Oil Equipment & Services Fund (IEZ)

by on January 21, 2011 | ETFs Mentioned:

One of the biggest stories in the world of finance over the past few weeks is undoubtedly crude oil’s ascent to near 52 week high levels. The important commodity has benefited from a surge in optimism in a number of developed markets as investors bought up shares in America and the debt crisis in Europe cooled. Yet concerns still remain for the price of black gold as some fear that the commodity may have reached a top for the time being and that tightening measures in a variety of developed markets may lead to a sharp correction in the near future.

In fact, prices slumped more than $2/bbl. in yesterday’s session, falling below the $90 mark for the first time in a week, calling into question when oil will again approach the $100 level. While disappointing for integrated oil firms, the drop has been especially troubling for oil equipment firms that have been hard hit by the lack of demand for new exploration and the ban on offshore drilling in the Gulf of Mexico. These firms thrive off of more oil exploration projects which are bound to come when oil is elevated but not as much when prices are slumping back to earth. However, these concerns could soon fall by the wayside given that crucial oil equipment bellwether Schlumberger (SLB) is scheduled to report earnings later today potentially giving guidance to the rest of the sector on the market outlook for 2011 [see all the ETFs that have exposure in any company with our free Stock Exposure Tool].

Schlumberger, the Houston-based oil service giant is scheduled to give its fourth quarter earnings report, potentially setting the tone for the rest of the industry in the process. The company is expected to post earnings of 77 cents a share on revenues of $8.7 billion which compares relatively favorably with the year ago period in which the company reported earnings of 67 cents a share on revenues of $5.74 billion suggesting that business has begun to improve for the company.  However, some expect the continued lack of activity in the Gulf region to hamper SLB’s earnings; last quarter the lack of activity in the region was said to cost the company between two and three cents per share and could reach up to five cents for the fourth quarter report due out today. Nonetheless, analysts expect this setback to be more than canceled out by robust onshore drilling activities thanks to a renewed focus on more mature oil fields as well as natural gas drilling across the nation. However, given the rocky markets for fuel prices, many analysts will instead be focusing in on guidance for the new year in order to give direction for the in focus sector in 2011 [also see Finding The Right Oil ETF For A Crude Rally].

Thanks to this key earnings report, we look for the iShares Dow Jones U.S. Oil Equipment & Services Index Fund (IEZ) to remain in the spotlight throughout Friday’s trading session. The fund allocates its top individual holding to the in-focus Schlumberger Corp which makes up 16.7% of the total assets of the fund. In addition to SLB, the fund also offers heavy allocations to fellow oil service firms Halliburton (8.8%), National Oilwell Varco (7.5%), and Baker Hughes (6.7%). In terms of market cap exposure, the fund is pretty spread out with small cap securities comprising 15%, medium with 30.4% and the rest going towards large companies [see The Definitive Oil ETF Guide].

IEZ has performed very well over the past half year period gaining 38.1% as oil prices and the general economy have rebounded. However, in 2011, the fund has sunk back down on worries over earnings and a potential short-term top in oil prices. The iShares fund is now flat on the year and is looking for direction heading into SLB’s report. Should SLB manage to impress investors and post solid earnings look for the entire sector to rise out of the doldrums heading into February. If however, the key oil equipment firm is unable to provide investors with solid guidance look for IEZ to continue its slide in Friday trading [see more on IEZ's holdings page].

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Disclosure: No positions at time of writing.