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OIH: What’s Next For The ETF After Schlumberger, Cameron Intl. Merger?

Market Vectors Oil Services ETF is the largest fund in the oilfield services space with nearly $1.1 billion of assets under management. The fund has outperformed its rivals this year, posted one of its biggest weekly gains last week, and could rise again in the future as M&A activity picks up. Focus now shifts to the fund’s fifth largest holding National Oilwell Varco which could move to acquire FMC Technologies. The slump in oil prices has dragged the oilfield services stocks, but last week, the Market Vectors Oil Services ETF (NYSEARCA: OIH ), posted one of its biggest gains this year as Schlumberger (NYSE: SLB ), the fund’s top holding, announced its decision to acquire Cameron International (NYSE: CAM ), its fourth largest holding. Market Vectors Oil Services ETF is the largest fund in this space with nearly $1.1 billion of assets under management. The fund concentrates on investing in 25 of the largest U.S. listed oil services companies ranging from Schlumberger, to land driller Helmerich & Payne (NYSE: HP ), offshore driller Transocean (NYSE: RIG ), oilfield equipment maker McDermott International (NYSE: MDR ) and fracking sand provider U.S. Silica (NYSE: SLCA ). The fund’s primary strength is its focus on few but well established companies that have significant economic moats. Most of the fund’s underlying holdings have seen several downturns before and are well positioned to face the current one. By comparison, other funds, such as the iShares U.S. Oil Equipment & Services ETF (NYSEARCA: IEZ ) and the SPDR S&P Oil & Gas Equip & Service ETF (NYSEARCA: XES ), have exposure to nearly twice as many companies, but this includes a number of medium to small cap players that have bore the brunt of the oil price collapse. As a result, these funds have underperformed this year when compared against Market Vectors Oil Services. OIH Top Ten Holdings Schlumberger 22.43% Halliburton (NYSE: HAL ) 13.76% Baker Hughes (NYSE: BHI ) 8.57% Cameron International 5.78% National Oilwell Varco (NYSE: NOV ) 5.31% Helmerich & Payne 4.29% Weatherford International plc (NYSE: WFT ) 4.15% Tenaris S.A. (NYSE: TS ) 3.98% FMC Technologies, Inc (NYSE: FMC ) 3.71% Transocean Ltd. 3.12% On a year-to-date basis, Market Vectors Oil Services has fallen by 14.4% while iShares U.S. Oil Equipment & Services and SPDR S&P Oil & Gas Equip & Service have declined by 17.3% and 25.3% respectively. But last week, Market Vectors Oil Services climbed by nearly 13.5% when two of its biggest holdings announced a merger agreement which has been unanimously approved by the boards of the two companies. As I have mentioned in my previous articles ( here and here ), the deal is positive for Schlumberger as well as the offshore drilling industry. But the merger can also open doors to further consolidation in the oilfield services space. And that could push Market Vectors Oil Services higher. The subdued pricing environment, with crude hovering near the low $40s, will force the exit of marginal producers and lead towards industry consolidation with bigger, well established companies buying the weaker ones, just as we’ve seen in every oil cycle over the last three decades. Schlumberger’s purchase should give confidence to other oil service companies who’ve been patently waiting for acquisition opportunities. The four largest stocks of Market Vectors Oil Services, namely Schlumberger, Halliburton, Baker Hughes and Cameron International, are already working towards mega mergers. But investors should watch out for National Oilwell Varco , which provides equipment and components to exploration and production companies. National Oilwell Varco has been struggling in the downturn, but it is one of the oldest and well established companies in the energy sector that has a wide economic moat. Furthermore, the company comes with a solid track record of making bolt-on acquisitions during downturns. In fact, historically, these acquisitions have played a crucial role in fueling the company’s growth. And currently, the company has been actively looking for acquisition opportunities. During the most recent conference call , National Oilwell Varco’s management said that they have already raised the size of their credit facility to $4.5 billion “in preparation for potential [acquisition] opportunities.” There are a number of companies that could be on National Oilwell Varco’s radar such as Dril-Quip (NYSE: DRQ ) and Forum Energy Technologies (NYSE: FET ). But if National Oilwell Varco follows in Schlumberger’s footsteps by buying a company with highly advanced technological capabilities and significant offshore exposure, then there is no bigger name than FMC Technologies which dominates the global subsea equipment market. A potential tie-up would not only give birth to one of the world’s biggest equipment maker in the energy industry, but could also lift Market Vectors Oil Services higher as National Oilwell Varco is the fifth largest and FMC Technologies is the ninth largest holding of the fund. Although Market Vectors Oil Services has struggled this year and could continue to remain under pressure in the near term, at least until we get a clear idea of where the oil price and the 2016 exploration and production budgets are heading, it can prove to be an interesting speculative play on an uptake in mergers and acquisition activity, especially since its underlying companies are actively seeking acquisition opportunities and a merger between National Oilwell Varco and FMC Technologies – two of its ten largest holdings, is very much possible. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Authorized Participants Bail On Equity ETFs During The Week

By Tom Roseen As one might expect, given the meltdown in the global markets, fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]); however, they redeemed only a net $5.5 billion for the fund-flows week ended August 26, 2015. Investors redeemed some $17.8 billion from equity funds, $2.6 billion from taxable bond funds, and $345 million from municipal bond funds, but they were net purchasers of money market funds, injecting $15.2 billion for the week. During the fund-flows week world markets were whipsawed by concerns of slowing global growth, the devaluation of the Chinese yuan, fears about China’s slowing economy, and the continuing plunge of commodity prices. Oil prices slid below $40/barrel for the first time since February 2009 as a result of a decline in global demand and a glut in oil supply. An early measure of China’s factory activity declined to a six-and-half-year low in August, putting additional pressure on the market. The U.S. broad-based indices were down at least 10% from their recent market highs, entering what many define as a market correction. At one point on Monday the Dow Jones Industrial Average declined more than 1,000 points before bouncing back slightly, but it still closed down 588.47 points (3.6%) for the day (its largest one-day percentage decline since August 2011). Despite the People’s Bank of China’s cutting its benchmark interest rate 0.5 percentage point on Tuesday and injecting 150 billion yuan into the financial system to prop up China’s market, the Shanghai composite lost 22.85% during the flows week. Nonetheless, on Wednesday U.S. stocks broke a six-day losing streak and witnessed their largest one-day gain in nearly four years as investors pushed stocks higher on news of the PBOC’s new easing efforts, better-than-expected economic news, and comments by New York Fed President William Dudley that the case for a rate hike in September is less compelling, given the volatility in global markets. (click to enlarge) For the first week in three equity ETFs witnessed net outflows, handing back $15.2 billion (their largest amount since the week ended August 6, 2014). With concerns about a slowing global economy, authorized participants (APs) were net redeemers of domestic equity funds (-$10.4 billion), withdrawing money from the group for a sixth consecutive week. They also redeemed money from nondomestic equity funds (-$4.9 billion) for the first week in four. Interestingly, for the second consecutive week APs were net purchasers of taxable fixed income ETFs, injecting $2.1 billion for the week. The lion’s share of the money went into government-Treasury ETFs (+$2.0 billion) and flexible portfolio ETFs (+$1.0 billion), while corporate high yield ETFs (-$0.7 billion) and international & global debt ETFs (-$0.4 billion) witnessed the largest net outflows in the taxable fixed income ETF universe.

Stocks Higher 10 Years From Now

Before the onset of the market weakness in the early part of last week and the end of the prior week, S&P Dow Jones Indices released a report highlighting rolling 10-year annualized returns for the S&P 500 index. The report seems prompted by a response Warren Buffett made to a question on timing the market. Buffett noted he was not a market timer, and simply responded, “Stocks are going to be higher, and perhaps a lot higher, 10 years from now. I am not smart enough to pick times to get in and get out.” In the report, S&P notes: “Since 1947, the S&P 500’s price return was up in 72% of calendar years. Add in dividends reinvested and that batting average jumped to 80%.” “And if one is worried that the S&P 500 has gone too far since the conclusion of the 2007-09 mega-meltdown bear market, consider that the rolling 10-year CAGR through Q2 2015 was +7.9%, nearly 400 basis points below the long-term average.” “… there have been times when things didn’t work out too well for investors, but these times were few and isolated. Of the 278 quarters of rolling 10-year CAGRs from Q1 1946 through Q2 2015, only eight were negative, and they all occurred between Q4 2008 and Q3 2010.” (Source: S&P Dow Jones Indices ) The S&P report contains additional detail on sector returns going back to 1990 and investors should find the entire report a worthwhile read. One sector highlight noted in the report is the fact that, “… each sector recorded very high monthly 10-year CAGR batting averages, or frequencies of positive observations, from 100% for consumer staples, energy, materials and utilities, to 79% for telecom services and 67% for financials. The S&P 500’s average was 87%.” In short, timing the market can be a difficult endeavor for many investors. Last week’s heightened market volatility is an example of this, especially for those who sold out of stocks on Tuesday. Share this article with a colleague