1 Way to Play a Rebound in Oil and Gas Equipment and Services

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some oil and gas equipment and services stocks to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Oil and Gas Equipment and Services ETF (NYSEMKT: XES  ) could save you a lot of trouble. Instead of trying to figure out which oil and gas equipment and services companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on oil and gas equipment and services stocks, sports a relatively low expense ratio -- an annual fee -- of 0.35%. The fund is fairly small, though, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This oil and gas equipment and services ETF outperformed the world market over the past five years but has lagged it over the past three. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver. And fallen stocks can present attractive opportunities.

Why oil and gas equipment and services stocks?
Oil and gas are likely to remain in demand for quite some time despite the rising profile of alternative energies. Along with the big oil and gas companies familiar to most of us, there are a host of oil and gas equipment and services companies that support them, many of which are attractive investments.

More than a handful of oil and gas equipment and services companies had unimpressive stock performances over the past year, but some see rising natural-gas prices creating a buying opportunity here. Weatherford International, Ltd. (NYSE: WFT  ) gained 7%. It has faced some legal and accounting-related problems in the recent past, but has been moving beyond that. Still, its last quarter featured flat revenue and net income below year-ago levels. The Swiss-based company has considerable international exposure, which is good, but it also has considerable debt, which it's working on paying down.

National Oilwell Varco  (NYSE: NOV  )  advanced just 1%. Its market cap tops $30 billion thanks to savvy acquisitions and an effective growth strategy. The company faces good kinds of problems, such as trying to meet demand and deal with a huge and growing backlog, which recently topped $15 billion for capital equipment orders. It's spinning off its lower-margin oil field production equipment distribution business in order to focus on higher-margin work. The company doubled its dividend last year – it recently yielded 1.4% -- and seems an attractive buy.

Other oil and gas equipment and services companies did even more poorly over the last year, but they could see their fortunes change in the coming years. Transocean Ltd. (NYSE: RIG  ) , an offshore drilling rig owner and specialist in ultra-deepwater drilling, sank 20% -- but for patient believers, it yields 5.1%. The company, long embroiled in the Horizon oil spill, has been selling off some assets and focusing on particularly difficult drilling challenges that offer greater profitability. Transocean has been signing lucrative contracts and has a $30 billion order backlog, but also a lot of debt, leading to some poor ratings from Wall Street. Indeed, analysts at Barclays warn that falling dayrates could cause the stock to drop sharply, while peer Noble Corp. warns of an industry slowdown.

McDermott International  (NYSE: MDR  ) plunged 35% and analysts at Zacks recently issued a strong sell rating on the stock. They cited erratic results, an uncertain future, cost overruns, and shrinking profit margins, among other things. Its last quarter featured revenue and earnings down by double digits over the previous year and also below analyst expectations. It does have a hefty $4.6 billion order backlog, but that's been shrinking, too. It might end up performing well from here, but it offers less certainty than many other stocks and is not for the risk averse.

The big picture
If you're interested in adding some oil and gas equipment and services stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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