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Drill Into Oil Services to Play Rising Energy Prices

Oil's current rise and long-term trends all bode well for this sector

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It’s beginning to feel a little like déjà-vu for investors in the energy sector. After seeing oil prices retreat during the market’s recent rout, energy is once again advancing higher — and on Wednesday breached the critical $100- a-barrel mark. The latest U.S. consumer price figures released Wednesday were subdued, mainly due to lower energy prices in October. But it looks like that dip isn’t going to last.

While it seems contrary to headlines about slowing economies, long-term energy use continues to steadily rise. Led by new sources of demand in the emerging world, overall energy usage is estimated to rise by 53% before 2035, according to the U.S. Energy Information Administration. Non-OECD nations will require 63% more energy than their developed counterparts. This higher demand, coupled with rising prices will benefit the overall energy sector. However, one subsector could see the lion share of the gains.

Can’t Drill Without ‘Em

Higher energy prices and rising demand are quickly becoming a win-win for the energy services stocks. Providing the equipment and technological know-how needed to extract oil and gas from the ground, oil services companies are poised to benefit on a variety of fronts.

First, production from “legacy” and mature fields is declining rapidly. To squeeze out every last drop of oil from a well, new advances in technology will be required.

Second, with some analysts estimating that the world is facing a 36 million barrel-a-day shortfall over the next 20 years, exploration and production (E&P)  firms have looked toward traditionally expensive and unconventional sources of energy. Advancements in seismic and drilling technologies have pushed producers into deepwater offshore regions. More than half of all the major recent oil discoveries have been made in these sorts of fields.

Extracting oil from harsh environments such as the vast oil sands in Alberta or in the ultra-deep water fields off the coast of Africa will require E&P firms to spend billions of dollars. So far, 2011 has been a banner year for capital expenditures by E&P firms, hitting the half-a-trillion dollar mark for the first time. Next year is shaping up to be equally impressive. All of this extra spending is further buoyed by oil’s higher prices.

Finally, the domestic oil services industry could see additional growth from infrastructure upgrades in the Gulf of Mexico. BP’s (NYSE:BP) Deepwater Horizon catastrophe has helped highlight several issues within the region. The Gulf is home to the world’s largest network of subsea infrastructure. Much of which is decades old and will need replacing in coming years.

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