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Shares of Oilfield Service/Equipment companies have perked up as readings on the economy have started coming in generally stronger. The group languished earlier in 2010 when the Gulf oil spill hurt sentiment toward the industry. But indications of better business prospects are now leading investors to shift funds back into this segment of the Energy sector.

Value Line favors shares of Complete Production Services (CPX) and RPC, Inc. (RES) for the near term. Both of these service providers are benefiting from the sharp rise in the development of North American shale fields. The drilling boom has resulted in much improved sales, operating margins, and a big jump in those companies’ bottom lines, propelling their share prices to fresh 52-week highs. We also like Helix Energy (HLX), a provider of specialized offshore services.

Other oilfield services stocks are benefiting as well, and are advancing as earnings comparisons turn favorable, and in anticipation of better times ahead. The recent strong price action of industry leader Schlumberger (SLB) best exemplifies this move. Business prospects are being helped by healthy oil prices, rising forecasts for oil demand in 2011, and cold weather early in the heating season. Indeed, frigid temperatures on both sides of the Atlantic raise the possibility that worrisomely low natural gas prices could move up on rising usage. It’s often the case, too, that once a weather pattern sets in, it can remain in place for weeks or months at a time. There is also some thinking that volcanic ash lingering in the atmosphere as a result of the eruption of the Iceland volcano last April could contribute to unseasonably cold temperatures this winter. Rising fuel requirements are a definite plus for oilfield services stocks.

Not all of the stocks in the group have been stars lately. Most notably, shares of companies renting out drilling rigs haven’t participated in the stock market rally as much as their counterparts that provide services. That’s in so small part due to the disruption caused by the Gulf oil spill and the subsequent (since lifted) ban on Gulf of Mexico deepwater drilling. Companies based in Houston, such as Diamond Offshore (DO), tended to use the Gulf of Mexico as their home base, but have had to move rigs elsewhere with the slowdown in Gulf drilling. Having extra equipment available has kept a lid on rental rates.

Even so, it is still a pretty good market for contract drillers. Profits remain relatively high, and the slowdown in the Gulf won’t last forever. It is conceivable that Gulf of Mexico drilling could get back to normal in a year or two. If that assumption pans out, there’s a good chance that much of the good appreciation potential offered by some of the contract drilling stocks will be realized out to mid-decade. Stocks such as Diamond Offshore, Noble Corp. (NE), and Transocean (RIG) could revisit their previous highs. The caution with Transocean is that its Deepwater Horizon rig is the one that sank during the Gulf spill, and the amount of responsibility it will ultimately bear has yet to be determined. On shore, shares of Nabors Industries (NBR) would benefit if natural gas prices were to reignite.

 

At the time of this writing, the author did not have positions in any of the companies mentioned.