S&P Likes 1 ETF For Gulf Drilling Rebound
Broadly speaking, it has been a rough year for oil services stocks, a high-beta group that often shows an intimate correlation to crude futures. The U.S. rig count has fallen from 2,000 in December 2011 to the current level of about 1,800 due in large part to plunging natural gas prices.
However, there might be reason to be optimistic about the prospects for the oil services group, particularly as the Gulf of Mexico "is staging a comeback," S&P Capital points out in a new research note.
"It is in the deepwater that we are seeing an ongoing resurgence and recovery," said S&P Capital IQ in the note. "At the time of the Macondo oil spill in April 2010, there were 33 actively working rigs in the deepwater. Then came the moratorium on drilling (May 2010 - October 2010), followed by a prolonged malaise, aka the 'permitorium', during which it was theoretically possible to get a drilling permit but unrealistic to get one in short order. The industry responded by either terminating rig contracts, or agreeing to lower standby day rates while the regulatory process evolved."
Offshore services providers count on deepwater drilling activity as a significant driver of revenue and profits because day rates for those rigs are far higher than for land-based rigs. Earlier this year, ultra-deepwater day rates touched a record high of $600,000.
S&P said fundamentals are starting to improve and that there are currently 39 deepwater rigs active in the Gulf.
"We estimate that 22 new deepwater rigs will roll off the delivery line in 2013, and of those, seven are already under contract and destined to go to work in the U.S. Gulf. We estimate that the U.S. Gulf deepwater rig count will reach a record high by year end 2013, perhaps in the 45-50 range, as those seven units begin to go to work," according to the research firm.
In the note, the firm placed four-star ratings on Atwood Oceanics (NYSE: ATW), Noble (NYSE: NE) and Ensco (NYSE: ESV). Among oil services ETFs, S&P rates the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE: XES) Marketweight.
XES, which has $273.6 million in assets under management, uses an almost equal-weight approach. While rival oil services ETFs are heavily to just a couple of stocks such as Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), no holding in XES receives a weight of more than 3.06 percent. Among the aforementioned stocks, Ensco is a top-10 holding in XES while Atwood and Noble are found further down the ETF's roster. Schlumberger and Halliburton combine for just 5.1 percent of the ETF's weight.
Year-to-date XES is off 2.8 percent, a performance that puts the fund almost inline with the rival iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYSE: IEZ). The Market Vector Oil Services ETF (NYSE: OIH), the largest oil services fund by assets, is modestly higher on the year. Sclumberger and Halliburton combine for over 31 percent of OIH's weight and over 28 percent of IEZ's weight.
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