With oil sitting above the $100 level and the threat of much higher prices later this year a reality, investors need to pay attention. The spike in oil has been driven by two main factors, increasing demand in the emerging markets and supply concerns over unrest in oil-producing regions of the world. (For additional reading, check out A Guide To Investing In Oil Markets.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The last oil spike occurred last year with the uprising in Libya and now the attention as turned to the possible Israel-Iran conflict. Libya is not a major player in supplying oil to the rest of the world and an escalation in the Iran situation would have much dire consequences on the price of oil.

From an investment standpoint, I am going to take my focus away from the Middle East and the unrest that has built a premium into the price of oil. I will turn my attention to companies that are in the business of supplying equipment and services to the drillers. The oil and gas equipment and services companies will be critical to the expansion of drilling near the U.S. and in other parts of the world that are not susceptible to the levels of uncertainty that is currently occurring.

Major Players
Core Laboratories (NYSE:CLB), based in the Netherlands, provides services that include production enhancement, reservoir description and reservoir management. As oil and gas companies try to get the most out of each reservoir, a company such as CLB could be extremely helpful. The stock price has reflected the demand for its services as it hit a new all-time high in February. CLB trades with a PEG ratio of 1.35 and pays a minimal dividend of 0.9%.

FMC Technologies (NYSE:FTI) designs and manufactures systems used by oil and gas companies both offshore and onshore, and also runs an energy infrastructure division. After hitting an all-time high in early February, the stock has pulled back to support near the $49 area and is once again looking like a buying opportunity. The PEG ratio is 1.8 and the stock does not pay a dividend.

Oceaneering International (NYSE:OII) provides products and services to the offshore drilling industry, with an emphasis on deepwater drilling. The stock also hit an all-time high in February and has since pulled back about 8% after a two-month rally. The stock will see strong support in the low $50s, where OII would signal a buying opportunity. The PEG is an attractive 1.1 and the dividend yield is 1.1%.

Helix Energy Solutions (NYSE:HLX) is an offshore energy company that provides reservoir development services to the oil and gas industry. The stock is well off its all-time high set in 2007 and the chart is not as attractive as the first three stocks. However, the technicals have been improving and with a PEG ratio of 0.9, the stock is also attractive fundamentally. A buy in the mid-teens would offer the best reward-to-risk setup.

The Bottom Line
The number one factor that will drive the prices of the service and equipment stocks higher will be more drilling both offshore and onshore; the catalyst for that will most likely be higher oil prices. This is why I look at the sector as a secondary play on rising energy prices around the world. The risk is that the economy slows and demand for oil wanes. This scenario would be devastating to the sector. (For more, see Earning Forecasts: A Primer.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center