One of the biggest stories from the second quarter of the year wasthe Deepwater Horizon oil spill which continues to contaminate the Gulfof Mexico. As embattled oil giant BP prepares to finally seal off thewell, the focus moves from containment to blame which has put a varietyof companies in the spotlight of both the government and shareholders.In addition to shaving close to $70 billion off of BP’s market cap, thedisaster has put the oil service industry into focus with companiesgrowing increasingly concerned over the extent of an offshore drillingban 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 inthe sector have reported robust earnings so far this quarter. Two ofthe biggest names in the industry, Halliburton (HAL) and Schlumberger (SLB),posted extremely strong profits for the most recent quarter which hashelped 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 andthanks to its global reach which left the firm less exposed to the Gulfthan some of its peers. Yet, even the spill-implicated Halliburtonreported an impressive increase in profits, posting a gain of 83% overthe previous quarter. HAL cited the robust demand for land basednatural gas drilling as the reason for the increase saying that thiswill more than make up for the loss in offshore drilling in the Gulf.These bullish reports look to put the pressure on another oil servicegiant to perform in this crucial earnings period; Transocean (RIG).
Thecompany, has been one of the big three involved in the spill and looksto 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 thedisaster, this report should put the struggling sector into focus formuch of today’s trading session. Shares of RIG have already been hithard by the disaster and are down more than 40% so far this yearleaving the company with a robust forward P/E of just 5.4. Analysts areexpecting the company to report EPS of $1.71 versus $2.79 in the prior year periodon plunging revenues which are expected to drop 11.3%, a huge downturnwhen 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. Inaddition to this sizable weighting in RIG, the fund offers similarlevels of exposure to Baker Hughes, Schlumberger, and Halliburton. Thefund holds 15 securities in total and has a heavy focus on large capfirms which make up close to two-thirds of the fund’s total assets. OIHhas had a rough year, posting a loss of 9.3% so far in 2010 but it hassurged in recent weeks, posting a gain of 11.8% over the past month.However, a weak report from RIG later today could undermine thissector’s budding recovery and send the fund further into negativeterritory on the year [also see Are Energy ETFs Now A Buy?].
Disclosure: No positions at time of writing.
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