Oil Service ETF (OIH) Sinks On Oil Spill Disaster

by on April 30, 2010 | ETFs Mentioned:

Oil service firms were in focus earlier this year when President Obama announced that he was lifting a ban on expanded offshore oil and gas drilling on parts of the Atlantic coast. However, recent developments have thrown a wrench into these plans, as a number of government organizations and private sector firms race to avoid a disaster in the Gulf Coast region.  On April 20th, a Transocean rig called the Deepwater Horizon caught fire and exploded, presumably killing as many as 11 people. After burning for close to two days, the rig sunk on the 22nd, setting off the next phase of the crisis (see the full timeline here) .

Earlier this week officials noticed that the rig was beginning to leak oil, and it has continued to do so since the incident was first discovered. Now officials estimate that the spill covers some 600 square miles off of the Louisiana coast and has recently started to come ashore on Louisiana marshlands. NOAA experts now estimate that 5,000 barrels a day of oil are spilling into the gulf; over five times what was initially thought to be leaking from the oil rig disaster (also see The Definitive Oil ETF Guide).

Besides the obvious economic and ecological impact of this disaster, the incident is likely to have a huge impact on some ETFs in the  Energy Equities ETFdb Category. Seemingly the most affected securities are those in the oil service industry, which have seen their shares plummet for two reasons. First, some believe that a lack of safety protocols on the rig contributed to the disaster, and are concerned that Transocean and Halliburton could be held financially liable for the incident. “This direct liability concern is valid, but longer term concern for disruption to activity in deep-water Gulf of Mexico and is an incremental worry,” energy research firm Tudor Pickering Holt & Co said in a note to clients on Friday. “(Exploration and production) companies generally indemnify the oil service companies and drillers against well control issues.” Furthermore, Obama advisor David Axelrod announced that all new Gulf drilling projects will be put on hold, suggesting that the lifting of the ban that Obama signed into law earlier this year will soon be reversed.

ETF Impact: Merrill Lynch Market Oil Service HOLDR (OIH)

OIH focuses on firms that engage in the service of oil wells, drills, and platforms, and some of its major components are the biggest players in the current crisis. OIH looks to be in focus for the foreseeable future as the damages are tallied up and blame is assessed among firms in the industry. The fund, like most HOLDRs, is extremely concentrated, holding only 16 firms (see Five Facts About HOLDRs Every Investor Must Know).  Some of its top holdings include Transocean (16.2%), Schlumberger (11.2%), and Halliburton (10.7%). Although Slumberger has managed to avoid the brunt of the impact from the oil spill (its shares were down roughly 1.2% in mid-day Friday trading) Transocean and Halliburton have not been so lucky. Both companies were recently downgraded by a research firm and saw their price targets cut significantly. Transocean was down more than 7% at the halfway point of Friday trading while Halliburton saw its shares tumbling by just over 3% (see more information on OIH’s holdings). This news has caused OIH to tumble as well; the popular energy ETF saw its shares fall by close to 2.5% in Friday trading as concerns mount over the economic impact of this disaster (see charts of OIH here).

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Disclosure: No positions at time of writing