If You Fear U.S. Regs That Filter Oil Profits, Then Fill Up on These ETFs

The surging price of crude oil has boon to oil companies and shareholders alike. But surging prices and profits have also been identified as the catalyst responsible for the decades-high rates of inflation we are currently suffering through. This phenomenon is not unique to the U.S. and has provided an opportunity for some governments to rationalize the nationalization of these profits. The first to take such steps was the U.K., which announced an additional 25% levy on oil company profits. Close on the heels of U.K. Prime Minister Boris Johnson is President Joe Biden, whose comments regarding what he views as excessive oil company profits have been heard loudly. Oregon Sen. Ron Wyden has a proposal in the works that includes an additional 21% additional levy on oil company earnings in excess of a 10% profit margin. There seems to be political willingness to pursue this in the House of Representatives, but getting a bill like this through the Senate is another issue. In the event that such a bill gets passed into law, I thought I would take a look at some funds that have an energy focus, but sit just outside the scope of this type of legislation. These companies make up the oil services sector. The Energy Select SPDR Fund is among the oldest exchange-traded funds in the U.S., launched with the rest of the SPDR Select Sector products in December of 1998. It wasn't until February 2001 that the then named Market Vectors Oil Service ETF was launched. The fund was acquired by VanEck years later and, if I recall correctly, because of issues with the original fund structure was relaunched in 2011 as the Van Eck Oil Services ETF (OIH). Since then, we have seen some other funds launched in this space, notably, the PowerShares launched and since acquired Invesco Dynamic Oil & Gas Services ETF and the SPDR S&P Oil & Gas Equipment & Services ETF . Oil Services vs. XLE Oilfield service companies, as the name suggests, are the companies that provide the machinery and labor used by oil companies to extract crude oil and natural gas. Their profit margins are not directly tied to the price of oil. I say not directly tied, because, given high oil prices, oil service companies make more money by leasing more equipment, or having more, or all of their existing equipment under contract. It is true that increased demand for rigs and the roughnecks who operate them often rise with higher oil prices but that is more a reflection of demand than it is a direct result of higher oil prices. The below table lists three oil service ETFs as well as XLE. There is a lot of overlap among the services funds (OIH has 72% overlap with PJX and 92% overlap with XES) but very little overlap between XLE and the other funds with all three funds having less than 14% overlap with XLE having services exposure to only Schlumberger , Haliburton and Baker Hughes . As an aside, XLE provides about $250 million worth of exposure in the form of a position in E-Mini Energy Select Sector futures, which are based on the same index as XLE. The biggest difference between these funds is that OIH is the only fund that is market cap weighted. I am usually not a fan of market cap weighting but in this industry, scale is a clear advantage, and the larger the company, the more equipment and manpower it will have to provide. This advantage is borne out in the below chart of YTD cumulative returns through June 15, 2022. Source: All You Can ETF, LLC Wrap It Up OIH was launched in an era when first-mover advantage was everything and its ability to maintain its dominance from an asset-gathering perspective is a testament to not only that advantage, but also the exposure it has provided shareholders over the years. My take is if you think oil company profits are going to be impacted by windfall tax legislation, but you still want to participate in the benefits of high oil prices, then OIH might be worth a closer look.

If You Fear U.S. Regs That Filter Oil Profits, Then Fill Up on These ETFs

As some nations look to take a cut of oil money -- and U.S. surtax legislation is floated -- let's look at what exchange-traded funds might protect investors.

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