Someone Is Nibbling At Oil Services ETFs

Few equity-based energy sector exchange traded funds have been plagued by falling oil prices on par with oil services funds. Entering Wednesday, the United States Oil Fund USO was saddled with a year-to-date loss of 26.7 percent, which triggered an average loss of just over 20 percent for the Market Vectors Oil Services ETF OIH and the iShares U.S. Oil Equipment & Services ETF IEZ.

Making matters worse is volatility, as in oil services ETFs are more volatile than traditional, diversified energy sector ETFs. Average year-to-date volatility for OIH and IEZ entering Wednesday was 32.7 percent, according to ETF Replay data, or nearly 900 basis points higher than the volatility on the Energy Select Sector SPDR XLE. 

Even with oil prices mired in a lengthy slump, investors have been dedicated to allocating new capital to ETFs like XLE. In fact, XLE, the largest equity-based energy ETF, is one of this year's top asset-gathering sector funds. It might be surprising to some, but OIH has taken a page from XLE's book, adding nearly $145 million in assets despite this year's less-than-impressive showing. 

Earlier this week, Street One Financial Vice President Paul Weisbruch highlighted upside call buying in OIH, the largest oil services ETF. As Weisbruch notes, OIH is the “go to” name among oil services ETFs for options traders, so the recent increase in options activity in the ETF is notable because it could be a sign that traders are betting on a rebound for the downtrodden fund.

Or, and we should emphasize this is purely speculation, that increased bullish options flow in OIH, could be signaling that more oil services mergers and acquisitions activity is afoot.

Last month, Schlumberger Ltd. SLB, the world's largest oilfield services company, said it will acquire Cameron International Corp. CAM for $12.7 billion. Schlumberger is OIH's largest holding at a weight of almost 20 percent while Cameron accounts for nearly five percent of the ETF's weight.

That deal, as big deals often do, touched off speculation regarding which oil services companies could be next to be acquired. Again, it is just speculation at this point, but National Oilwell Varco Inc. NOV and Weatherford International Ltd. WFT, two stocks that combine for over nine percent of OIH's weight, have recently been mentioned as possible takeover targets.

IEZ, the iShares oil services offering, also devotes more than nine percent of its combined weigh to National Oilwell Varco and Weatherford.