Let’s face facts- the era of cheap oil is long gone. Dwindling supplies from traditional fields along with rising global demand has put immense pressures on energy producers to find new viable reserves. Unconventional sources of supply- such as shale oil, deepwater drilling, and oil sands production- have now all become the standard bearers with regards to new quality reserves.
Unfortunately, tapping these assets are expensive and requires expansive technological know-how.
That fact has continued to push up capital expenditure (CAPEX) and exploration budgets at many energy firms. In order to produce oil, you just have to spend the big bucks. Luckily for the oil service sector, that spending will greatly benefit their bottom lines as well as their investor’s pockets.
Another Record Year For CAPEX Spending
It’s getting harder to feed the world’s oil and natural gas hunger these days. The declining yields of "legacy" fields as well as the rising complexity of pulling of new oil out of the ground is becoming a costly problem for many energy firms. Tapping today’s new energy resources are simply more expensive than in years past.
These assets are often located in remote areas of the world and require complex drilling techniques to access the hydrocarbons. More than half of all the new oil and gas fields recently discovered have been made in the deep-water’s offshore. Places like Russia's frozen Kara Sea, shale formations in Pennsylvania and offshore fields in Ghana, have now become the major sources of supply.
To that end, CAPEX budgets at energy producers- like Exxon Mobil (NYSE:XOM) -have ballooned to record numbers over the last few years. And they are estimated to keep growing in 2014.
Investment bank Barclay’s (NYSE:BCS) latest report on CAPEX budgets, the energy industry is expected to spend a whopping $723 billion on exploration and production (E&P) efforts in 2014. That’s nearly a 6.1% jump over 2013’s total CAPEX spending and will surpass the $700 billion-mark for the first time.
According to the survey of 300 energy firms, the bulk of that spending will occur in overseas fields. Roughly, $524 billion will spent on tapping new wells in places like offshore Africa and Middle East. However, North America will see the lion’s share of rising spending- roughly a 7% increase- as firms like Range Resources (NYSE:RRC) -continue to tap America’s shale formations.
All in all, higher spending by the E&P industry will put more dollars into the pockets of those firms providing all that drilling, well completion and other oilfield services.
Making An Oil Service Play
With several oil firms like Marathon Oil (NYSE:MRO) planning to drill an additional 250 wells in the Bakken along, the time for adding the oil service sector could be now.
A great starting point could be the iShares Dow Jones US Oil Equipment Index ETF (NYSE:IEZ).
The fund tracks 51 different oil service stocks from contract drillers like Ensco (NYSE:ESV) and total service firms like Baker Hughes (NYSE:BHI). Overall, the ETF makes for a total-package play on the theme and only costs investors just 0.45% in expenses. Another compelling option is the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES). The XES is equal-weighted meaning that no one firm makes up to much of its assets. That provides more exposure to small- and mid-cap oil service firms- ultimately, boosting its returns long term.
With the bulk of the recent elephant finds coming from undersea and deepwater sources, both FMC Technologies (NYSE:FTI) and Cameron (NYSE:CAM) could be buys. The firms are the two leading producers of critical subsea equipment called “Christmas trees.” That collection of values and manifolds allow undersea wells to be connected to collection devices on the surface. Overall, analysts expect that demand for these products to surge to 3,500 by 2015. That makes FTI, CAM as well as GE Oil & Gas (NYSE:GE) strong buys in the New Year.
Finally, you can’t talk about oil service stocks without mentioning the power-couple of Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB). Both have expanded their international offerings and continue to be the go-to purveyors of oil service equipment. At the end of the day, if you have to go with one oil service stock, it needs to either be HAL or SLB.
The Bottom Line
As global energy demand continues to trend higher, more pressure is being placed on finding new sources of supply. That fact is driving energy firms to open up their wallets in a big way. Overall, higher CAPEX spending will benefit investors in the oil services sector. The previous ideas- along with the broad-based Market Vectors Oil Services ETF (NYSE:OIH) –make ideals selections to play the rising CAPEX trend.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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