The best oil services shares

UK leads the way

In the intervening period, the UK established a worldwide reputation as the leading light in subsea technology, a great export success story that's been curiously played down in the wake of the Macondo disaster. This expertise has meant that UK players in the sector have been ideally placed to profit from the swing towards ever remoter deepwater oil & gas projects, while British companies such as Hunting have also been at the forefront of the development of new-generation extraction technologies that are transforming the industry.

Advances in subsea engineering and lateral drilling techniques are opening up previously inaccessible oil and gas fields, and are allowing producers to extend the commercial life of mature fields. It’s predicted that enhanced oil recovery techniques under way will significantly boost recovery and production levels in some of the world's largest maturing fields located in the Arabian Peninsula.

More controversially, by reducing the need for hardware above the waves, subsea technologies could become the preferred option for oil companies that get the go-ahead to exploit environmentally sensitive areas above the Arctic Circle. Another point worth considering is that well operators, particularly those representing national oil companies (NOCs), are now demonstrating a clear bias towards higher specification rigs due to the greater focus on safety in the wake of the Macondo disaster.

There are also opportunities for oil services companies as mature fields wind down. Although the commercial life of the UK's North Sea assets is being extended through advanced technologies, eventually the decommissioning of these fields will provide a significant revenue stream to the oil services sector. Industry analysts predict that North Sea decommissioning receipts could total as much as £35bn, with upwards of £500m budgeted annually. And given the relative age of the UK sites, it follows that remedial and maintenance-related contracts are on the rise. Factor in the deployment of offshore wind turbines, and it’s not difficult to appreciate the apex-linked opportunities available to specialist North Sea operators over the next two decades or so.

Crude’s likely trajectory

Aside from these in-field developments, we know that expectations for growth within the sector are predicated on long-term forecasts for the oil price. That's important for oil services companies, because investment by oil producers is determined by these predictions.

In reality, it's virtually impossible to make a definitive call as to crude's likely trajectory simply because of the number of variables in play, such as the increased influence of speculative investment, or the marginal costs of oil production, the influence of a cartel (Opec), or the amount of conventional hydrocarbons controlled by NOCs. However, based on a number of potential scenarios devised by the International Energy Agency, the median figure for a barrel of oil in the year 2030 will be $101 (£64) on a constant currency basis, while the 'high price' scenario comes in at $204.

You will find marked variations to these figures depending on which energy analysts you speak to, but, in general, it's true to say that the consensus long-term call for the oil price (in real terms) is well above the nominal level at which a viable investment incentive is provided - currently held at $70 a barrel. There certainly seems to be plenty of headroom when you consider that the price of Brent Crude averaged $111 through last year.

Growth linked to non-OECD demand

Growth within the sector will also be increasingly driven by non-OECD demand. Research from US industry consultancy Douglas-Westwood suggests that demand for three out of every five rigs will be generated outside of North America by 2015. China, India and the Middle East will be the principal drivers of the estimated 1.3 per cent annual increase in demand for petroleum products, while Russia and other Arctic Rim countries will also look towards the UK for technological inputs.

The push for unconventional oil and gas deposits will also benefit oil services companies and, although demand for rigs in the US has tailed off recently as prices for natural gas slumped, there is evidence that fracking projects are starting up again alongside a recovering gas price. UK investors looking to gain direct exposure to the growth in the US unconventional market could always opt for domestic operators such as National Oilwell Varco (NYSE: NOV). Then again, as the company's rig and drill-bit equipment can be found in around 90 per cent of all drilling rigs worldwide, its revenue streams are also diversified from a geographic angle.

IC VIEW

The FTSE Oil Equipment, Services & Distribution index has staged a partial recovery since it headed south at the beginning of May following a temporary slump in Brent Crude prices. Nevertheless, the index is still 15 per cent ahead year on year, and over the past five years it has been the third-best performing FTSE sector behind personal goods and technical hardware & equipment. The fortunes of oil services companies are, of course, still closely tied to oil and gas prices, and are therefore susceptible to short-term volatility. But growing global energy demand will underpin huge investment in exploration and production in the coming decades, which is why we are positive on the sector.