After lagging for most of the year, oilfield services stocks have suddenly flipped the script in Q4 and moved to the front of the pack. As of Nov. 20, The VanEck Oil Services ETF (OIH 1.18%) has gained 6.7% in Q4 at a time when the S&P 500 has fallen almost 2%.
NYSEMKT: OIH
Key Data Points
The recent rally has also happened at a time when crude has declined over 5% and the broader energy sector has been flat. This kind of leadership from services, while oil prices soften, usually signals tightening economics and pricing power beneath the surface.
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Digitizing the oilfield
The sudden interest and uptake in the Oil Services ETF has more to do with pricing power and growth rates than commodity prices. At the same time, this industry -- like so many others -- is undergoing a renaissance of sorts.
It's a change highlighted in Houston-based SLB's (SLB 1.49%) Q3 results posted Oct. 17, which made clear how its AI and digital technology efforts are growing and flowing to the bottom line.
"Digital continues to transform the oil and gas industry, and this has been our fastest-growing business in recent years," SLB CEO Olivier Le Peuch said in a company statement. "We have been on a long journey to digitize the oilfield -- from modeling and planning to operations and automation, " he added.
Given the oil and gas industry's tightening economics, Le Peuch also noted that customers have increasingly prioritized "production and recovery solutions that unlock incremental barrels at the lowest possible cost."
What you're left with is a sweet spot where capital expenditures are rising and rig utilization is hovering around 90%, while retirement of older equipment is also keeping supply tight. Taken together, all of that is leading to better pricing, better margins, and ultimately better earnings and stock performance.
Many stars, one standout
It's also telling to see that this industry rally is extremely broad-based, with Koyfin data showing only one of the 26 stocks in the Oil Services ETF is down over the past three months, at a time when 20 stocks have delivered 90-day gains ranging from 10% to 97%.
On top of the list, is ProPetro (PUMP 1.08%), up 90% QTD -- a short-term burst that turned a losing year into a winner in a matter of days. While the Midland, Texas-based fracking and oilfield completion services company expects its core businesses to see continued uncertainty due to tariffs and increased global oil production, the recent interest in the stock centers on its new PROPWR unit, which signed its first contract to provide 60 megawatts of power to a large data center operator in the Midwest.
While many of the biggest tech and AI-firms are investing heavily in new sustainable energy technologies -- including nuclear plays like Oklo and NuScale -- to power their data centers in the future, PROPWR's hybrid natural gas generator and battery storage solution is being targeted to be operational and deployed by the second quarter of next year.
Zooming out a bit, the Midland, Texas-based company is not for the feint of heart and has been through a series of surges and sell-offs that have seen ProPetro shares up as much as 18% and down more than 50% just this year. After its recent rally, the stock is now about flat on a year-to-date basis, but is still the 4th smallest stock in the Oil Services ETF with a market cap that's currently hovering around $1 billion.
Aggressive investors may take some comfort in the fact that while 6 of 9 analysts rate ProPetro "hold" and three have it as a "buy", their average 12-month price target of $12.11 a share reflects about 30% upside from current levels. In terms of their estimate accuracy, ProPetro has exceeded the consensus sales estimate three of the past four quarters, and beaten EPS projections half the time.
Understandably, ProPetro will not be a good fit for everyone, but it's important to remember that this oilfield services rally is, first and foremost, an industry trend, with more than a dozen other stocks in the portfolio that have posted gains of 15% or more in the past three months and have strong current momentum.
