The energy services story in 2015 has been a theme that has yet to prove itself as a long-term growth contender. However, that doesn’t mean we have lost faith in the fundamental story for oil and gas equipment companies.
At the outset of the year, we identified the iShares U.S. Oil Equip. (ETF) (NYSEARCA:IEZ) as a top comeback candidate in a beaten down sector. This ETF tracks 48 stocks engaged in complimentary services to large integrated oil companies. This includes well-known names such as Schlumberger Limited. (NYSE:SLB) and Halliburton Company (NYSE:HAL) as its top two holdings.
We selected IEZ versus other energy funds because of its outsized exposure to larger companies that are better positioned to ride out the storm in crude oil prices. In addition, we feel that this ETF offers significant upside potential given the risk-to-reward dynamics of a counter-trend rally in crude this year.
At the end of the quarter, this ETF is down approximately 5% year-to-date. However, IEZ is showing several positive technical signs that a sustainable low may be forming. Most notably is that it has tested the $45 level on the chart three times this year and held above that support line on a closing basis. This occurred even in spite of crude oil prices moving to new low of $43 per barrel in March.
Fund flow data in IEZ shows that this fund has been relatively stable, with just $35 million exiting the $325 million fund.
Nevertheless, this play is predicated on the strength of crude oil prices, which have been stymied by persistently weak demand alongside a strong U.S. dollar. If the United States Oil Fund LP (ETF) (NYSEARCA:USO) can mount a convincing rally from here, it would bode well for a return of momentum on the upside in IEZ.
Trades that bet on a comeback are not for the faint of heart and may be more appropriate for aggressive investors with a high risk tolerance. They often experience periods of higher volatility or prolonged sideways price action that is a precursor to the next big move. However, they can also be some of the most intriguing when viewed through the lens of relative value and potential profitability.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management.
Michael Fabian is Managing Partner and Chief Investment Officer of FMD Capital Management.
To get more investor insights from FMD Capital, visit their blog.
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