With the recent price spikes due to political tensions in the Middle East aside, oil prices continue to rise. New sources of demand coupled with dwindling supplies from traditional fields have put pressures on producers to find new viable reserves. Unconventional sources of supply, such as shale oil, deepwater drilling and bitumen production, have now become the standard bearers with regards to new reserves. However, drilling in these assets is expensive and requires expansive technological knowhow. These requirements ultimately drive up the price per barrel. Overall, higher capital expenditure (CAPEX) spending from major energy firms will greatly benefit those companies that operate in the oil services sub-sector.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.


Rising Costs and Demand
As global demand continues to rise, exploration and production (E&P) firms have had to look to unconventional sources in order to keep the oil flowing. These assets are often located in remote areas of the world and require complex drilling techniques to access the hydrocarbons. Places like Russia's frozen Kara Sea, shale formations in Pennsylvania and deepwater fields in Ghana, have now become the major sources of supply. However, tapping these regions come at a pretty hefty price tag.

According to research done by investment bank Barclays (NYSE:BCS), CAPEX by oil and gas industry is expected to increase 10% throughout 2012, reaching more than $598 billion. The investment banks estimates that the bulk of this spending will be by North American energy companies tapping into various shale reserves, specifically looking for natural gas liquids plays. However, the real aggressive driver of capital spending will be Latin American energy companies, with a 21% rise. Mexico's state-run oil firm PEMEX in Colombia's Ecopetrol (NYSE:EC) and Brazil's Petrobras (NYSE:PBR) will lead the charge in the region.

At the same time, demand from emerging markets and non-OECD nations continue to skyrocket. China consumes virtually all of new crude oil production as it undergoes its rapid urbanization. Overall, emerging markets demand has caused world oil consumption to double over the past five years. Analysts expect that trend to continue.

SEE: Should You Invest In Emerging Markets?

Poised to Benefit
With billions needed to be spent to find and extract oil in harsh environments along with growing demand, the oil services sector is poised to benefit long term. For investors, the time may be right to bet on the sector. The recently reconfigured Market Vectors Oil Services ETF (ARCA:OIH) makes an ideal broad starting point for an investment. The fund tracks 26 different oil service firms including industry stalwarts Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB). Expenses for the fund run a cheap 0.35% and liquidity is brisk. For those investors looking for more of a broad option, the iShares Dow Jones US Oil Equipment Index (ARCA:IEZ) spreads its assets out to 45 firms.

So much of the oil service industry is about drilling equipment and no one does it better than National Oilwell Varco (NYSE:NOV). The firm is the leading maker of drilling rigs, bits and other necessary drilling equipment. The parts and components find themselves into about 90% of all drilling rigs on the planet. That domination has allowed it to operate with very little debt and more than $8.33 per share in cash on its books. Overall, the firm trades at a relatively cheap price-earnings ratio of almost 17 and yields 0.60%. Likewise, rig equipment maker Dril-Quip (NYSE:DRQ) has benefited from the expansion of deepwater and offshore drilling.

The shale boom in the United States has been kind to CARBO Ceramics (NYSE:CRR). The firm manufactures ceramic proppants, which replaces the sand used in the hydraulic fracturing process. At its core, CARBO is making artificial sand that helps drillers improve productivity. With the bulk of new wells doting the U.S. landscape of the hydraulically fracked variety, CARBO is seeing huge demand for its cost saving products. That trend should continue as the shale revolution continues to play out.

SEE: A Guide To Investing In Oil Markets

The Bottom Line
Oil prices are on the move. 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 big on the oil services sector. Funds like the SPDR S&P Oil & Gas Equipment & Services (ARCA:XES) or individual stocks like Oil States International (NYSE:OIS) make ideal plays for the trend

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

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

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center