How Does This Oil and Gas Services ETF Stack Up?

Dissecting the iShares U.S. Oil Equipment and Services ETF

James Catlin
James Catlin
Apr 3, 2014 at 12:31PM
Energy, Materials, and Utilities

ETFs can be valuable tools, but breaking them down to determine their potential can be a bit daunting for the average investor. But don't despair -- today we'll be doing just that with the popular iShares U.S. Oil Equipment and Services ETF (NYSEMKT:IEZ) by examining some of the main components of the fund.

A quick note: Part one of this three-part series on energy ETFs can be found here, where the iShares U.S. Energy ETF was discussed along with its main components ExxonMobil and Chevron.

Over the last year the iShares U.S. Oil Equipment and Services ETF has kept pace with the S&P 500 average, up approximately 18% each. Following up a solid year like that will be no easy task, but IEZ might just have its best days ahead.

While the iShares U.S. Oil Equipment and Services ETF is composed of 52 different securities, the two largest holdings compose 31.37% of the fund. They are Schlumberger (NYSE:SLB) at 21.07% and Halliburton (NYSE:HAL) at 10.30%.

Recent advances in technology have made discovering and accessing resources once thought to be unrecoverable possible. Leading the way in this is Schlumberger, which also provides technology to reduce extraction costs while enhancing well production.

In 2013 Schlumberger's revenue climbed to a record $45.3 billion, up 8% from the previous year and the fourth consecutive year of growth. Schlumberger CEO Paal Kibsgaard commented, "Growth was strongest internationally, where revenue set a new record high, [which] grew by $3.2 billion, or 11%."

With approximately 70% of its revenue coming from outside North America, the world's largest oilfield services company looks poised to capitalize on markets with proven reserves such as Indonesia, Latin America, Africa, China, Russia, and the Middle East, to name just a few.

All this good news hasn't been lost on analysts, who are forecasting FY 2014 EPS of $5.77 -- which would be a 21.40% increase over 2013 EPS of $4.75. 2015 looks almost as promising, with analysts expecting $6.79 EPS, a 17.69% increase.

MetricSchlumbergerIndustry Average
PE 19.30 24.80
P/S 2.75 1.83
P/B 3.23 2.44
Sales-5 Year Growth Rate 14.99% 11.10%
Net Profit Margin-5 Year Average 13.90% 7.70%
RoA-5 Year Average 9.20% 5.30%
RoI-5 Year Average 12.70% 7.20%

Table created by author with data from The Motley Fool.

The price/earnings looks attractive in comparison to industry averages, but the price/sales and price/book look a tad expensive -- that is, until you factor in the massive out-performance in management effectiveness regarding growth, profit margins, and returns. Taking those metrics into consideration erases most concerns on the valuation front, and would even suggest that paying a premium could be warranted. 

While international exposure looks promising, many investors believe that North America could be on the cusp of an energy renaissance. Increased investment in this region could benefit those companies that are more domestically weighted, like Halliburton, which saw 65% of 2013 revenue derived from North America.

Chairman, president, and CEO Dave Lesar stated, "We are optimistic about our ability to grow our North America revenue and margins, and to realize continued revenue and margin growth in our international business, which we believe will result in double-digit growth in our earnings per share in 2014."

Analysts seem to agree, with the consensus projecting a 25.99% increase in FY 2014 EPS to $3.97. FY 2015 looks even better, with forecasts of $5.06 EPS, which is a whopping 27.40% jump over FY 2014's already impressive numbers.

Let's follow through with a quick evaluation of the same metrics.

MetricHalliburtonIndustry Average
PE 25.10 24.80
P/S 1.70 1.83
P/B 3.69 2.44
Sales-5 Year Growth Rate 14.34% 11.10%
Net Profit Margin-5 Year Average 9.20% 7.70%
RoA-5 Year Average 9.20% 5.30%
RoI-5 Year Average 12.20% 7.20%

Table created by author with data from The Motley Fool.

Recently surging to new highs, Halliburton still looks to be fairly valued and an outperformer in growth, profit margins, and returns.

A Fool's final word
Schlumberger and Halliburton are fairly valued, high-growth stocks that are leading names in a booming industry. One is positioned to conquer the international market and the other is poised to serve the burgeoning domestic market. With these two forming the backbone of the iShares U.S. Oil Equipment and Services ETF, this fund looks like an attractive way for investors to gain a foothold in this crucial industry.