Already being hammered by declining oil prices, the trade war and investors shifting away from riskier assets, downgrades from a major ratings agency could be the next headwind faced by cap-weighted oil services exchange traded funds.
What Happened
The VanEck Vectors Oil Services ETF OIH, one of the largest ETFs tracking providers of oilfield services, plunged 8.48 percent last week, extending its month-to-date loss to 20.5 percent.
Late Friday, Standard & Poor's, one of the major ratings agencies, lowered its rating on Sclumberger Ltd. SLB while paring its outlook on Halliburton Co. HAL.
Why It's Important
Understanding why the S&P downgraded the aforementioned oil services giant is important to OIH investors is easy. The two stocks combined for 35.45 percent of the ETF's weight as of Friday, May 24, according to issuer data.
In a Friday note, S&P lowered Schlumberger's credit rating by one level to A+ while trimming its outlook on Halliburton's debt from Stable to Negative.
Schlumberger, the largest oilfield services company, commands 20.85 percent of OIH's weight.
"Oilfield services companies will no longer be able to generate the high operating margins they did in 2014," S&P analyst Carin Dehne-Kiley said in the note.
Although prices are higher year-to-date, some recent data points indicate shale producers are cutting back in a bid to conserve capital. For a seventh straight week last week, the U.S. active oil rig count declined and the overall rig count remains well below the levels of a year earlier.
What's Next
The oil services group “fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth,” according to S&P.
News of the Halliburton and Schlumberger downgrades comes as OIH is mired in a major bear market. Not only did the ETF close Friday more than 28 percent below its 200-day moving average, OIH is just 5.18 percent above its 52-week low and nearly 51.5 percent below its 52-week high.
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