Higher CAPEX Spending Makes Oil Service Stocks A Buy

By Aaron Levitt | August 03, 2011 AAA

As global populations continue to increase, energy demand is following suit. Driven by new sources of demand in the emerging world, overall energy usage is estimated to rise by 49% by 2035. Non-OECD nations will require 63% more energy than their developed counterparts in that time frame. With rising demand, come higher oil prices. These higher oil prices have spurred expanded investment on the part of the drillers and refiners. Overall, this increase in CAPEX spending, along with the fact that much of the easy oil has already been found, will greatly benefit the oil services sub-sector.

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Resuming Record Spending
With some analysts predicting that the world will require an extra 36 million barrels of oil-a-day, exploration firms have stepped up their activities. According to Halliburton (NYSE:HAL), the next trillion barrels of oil will be harder to find and be more costly to access. In addition, many mature oil fields are showing signs of declining production and about half of all the new oil and gas fields recently discovered have been made offshore, specifically in deep waters. The declining yields of "legacy" wells and rising complexity of pulling of new oil out of the ground, is resulting in major increases in CAPEX spending by E&P firms.

According to industry consultant IHS Capital, spending on exploration and production by oil and natural gas companies is expected to rise about 12% to $406 billion in 2011. This is on the back of the 19% increase in spending during 2010. Analysts at Barclays (NYSE:BCS) are even more bullish on spending amounts. They estimate that global oil and natural gas E&P expenditures will rise about 16% this year to surpass the half-a-trillion mark for the first time. According to their survey, CAPEX spending will reach roughly $529 billion in 2011. The investment bank estimates that the bulk of this spending will be by North American energy companies tapping shale reserves as well as new deep water finds in the Gulf of Mexico. However, the real aggressive driver of capital spending will be Latin American energy companies, with a 26% rise. Brazil's Petrobras (NYSE:PBR) is looking to double its output by 2020 and Colombia's Ecopetrol (NYSE:EC) expects to spend 56% more this year on E&P after increasing spending 34% in 2010.

Playing the Spending Spree
Overall, the current high oil price environment should persist over the next several years, resulting in strong demand for the oil services sector throughout the foreseeable future. With some firms such as Marathon Oil (NYSE:MRO), expected to increase E&P spending by 37%, investors may want to consider the oil services sector. Both the iShares Dow Jones US Oil Equipment Index (NYSE:IEZ) and PowerShares Dynamic Oil & Gas Services (NYSE:PXJ) can provide broad access to the sub-sector. However, there are plenty of other options for investors. Here are a few picks.

Partnering with Petrobas to tackle its deepwater drilling, FMC Technologies (NYSE:FTI) has continued to rack-up contracts to provide undersea infrastructure. Overall, the company has delivered over 300 subsea trees for projects in Brazil and recently won a $125 million contract for 32 more subsea trees. FMC, along with Gulfmark Offshore (NYSE:GLF), which has signed a few contracts with Petrobras to provide vessels, make ideal ways to play the growth in Brazil's offshore oil fields.

Our aging pipeline infrastructure continues to be a point of contention in recent years. A string of high profile leaks and spills highlights the needed spending on repair and new pipelines. Small cap Team Inc. (NASDAQ:TISI) provides inspection and repair services for the pipeline sector, while Willbros Group (NYSE:WG) specializes in pipeline construction. These two stocks could benefit from increased CAPEX spending on new and aging pipeline networks.

The Bottom Line
With energy demand continuing to rise, oil and gas prices have followed suit. In response to these rising prices, many E&P firms have doubled their capital spending programs in order to meet demand. For investors, this means betting on the oil services sector. Funds like SPDR S&P Oil & Gas Equipment & Services (NYSE:XES) or individual stocks like Seacor (NYSE:CKH) make ideal plays for the trend. (For additional reading, check out A Primer On Offshore Drilling.)

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