Wednesday’s ETF To Watch: Oil Service HOLDR (OIH)

by on August 4, 2010 | ETFs Mentioned:

One of the biggest stories from the second quarter of the year was the Deepwater Horizon oil spill which continues to contaminate the Gulf of Mexico. As embattled oil giant BP prepares to finally seal off the well, the focus moves from containment to blame which has put a variety of companies in the spotlight of both the government and shareholders. In addition to shaving close to $70 billion off of BP’s market cap, the disaster has put the oil service industry into focus with companies growing increasingly concerned over the extent of an offshore drilling ban as well as their costs for the cleanup of the spill [also see Uncertain Future For Energy ETFs].

Despite the spill and the potential loss of business, companies in the sector have reported robust earnings so far this quarter. Two of the biggest names in the industry, Halliburton (HAL) and Schlumberger (SLB), posted extremely strong profits for the most recent quarter which has helped to cool fears over a downward spiral in the industry. SLB reported a 33% increase in profits on the back of North American land markets and thanks to its global reach which left the firm less exposed to the Gulf than some of its peers. Yet, even the spill-implicated Halliburton reported an impressive increase in profits, posting a gain of 83% over the previous quarter. HAL cited the robust demand for land based natural gas drilling as the reason for the increase saying that this will more than make up for the loss in offshore drilling in the Gulf. These bullish reports look to put the pressure on another oil service giant to perform in this crucial earnings period; Transocean (RIG).

The company, has been one of the big three involved in the spill and looks to be in focus today as it gives its second quarter earnings report. Due to the timing of this event, right as BP attempts to ‘static kill’ the remaining leak, as well as the company’s central role in the disaster, this report should put the struggling sector into focus for much of today’s trading session. Shares of RIG have already been hit hard by the disaster and are down more than 40% so far this year leaving the company with a robust forward P/E of just 5.4. Analysts are expecting the company to report EPS of $1.71 versus $2.79 in the prior year period on plunging revenues which are expected to drop 11.3%, a huge downturn when compared to its surging counterparts HAL and SLB [also read Five ETFs To Hedge Against Skyrocketing Gas Prices].

Due to this earnings report, we have decided to make the Merrill Lynch Market Oil Service HOLDR (OIH), which allocates 11.2% of its assets to RIG, today’s ETF to watch. In addition to this sizable weighting in RIG, the fund offers similar levels of exposure to Baker Hughes, Schlumberger, and Halliburton. The fund holds 15 securities in total and has a heavy focus on large cap firms which make up close to two-thirds of the fund’s total assets. OIH has had a rough year, posting a loss of 9.3% so far in 2010 but it has surged in recent weeks, posting a gain of 11.8% over the past month. However, a weak report from RIG later today could undermine this sector’s budding recovery and send the fund further into negative territory on the year [also see Are Energy ETFs Now A Buy?].

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Disclosure: No positions at time of writing.