Oilfield Services Still Has Room to Grow

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The market's upward climb during the past few months has hordes of investors looking for stocks that may still be cheap enough to be worthy of their attention. Finding opportunities is a tough assignment because Mr. Market turned so quickly in the spring, and now a slew of sectors may be fully valued.

With crude prices sitting above $70 per barrel, even in the face of reduced demand, I'd like to point out to my Foolish friends that one group that seemingly has room to grow is the oilfield services sector. There are identifiable reasons for that neglect, the most obvious being the plummeting rig count in North America after the collapse of oil and gas prices over the last year.

Higher prices will benefit services
But energy has always been a cyclical business and, with our economy showing some signs of life, it's difficult to envision crude prices heading appreciably lower. The result, as I see it -- especially if black gold maintains a slow, steady, upward trek -- will be the reemergence of a number of projects that were summarily halted when commodities prices fell. That chain of events, which seems hardly far-fetched, would do wonders for the service sector -- at least for those investors with patience.

So should Foolish investors rush out and buy the first service stocks they stumble across? Definitely not. There are a couple of criteria that are highly significant in deciding which members of the group to tie into, given our current state of affairs:

• Aim for those companies that do a substantial amount of their business abroad. For instance, Schlumberger (NYSE: SLB) operates through two divisions, with its far bigger oilfield services unit accounting for about 90% of its business. Of that amount, only about 17% of revenue is generated in North America. In contrast, Weatherford (NYSE: WFT), which is more heavily tied to its home continent, suffered a greater sequential decline in overall revenue compared to Schlumberger, as it saw North American contributions slide from 37% to 29% over the past two quarters.
• It's also appropriate to latch onto companies with strong technological bases. I've been stumbling around the oil patch since I was employed by a predecessor of Diamond Offshore (NYSE: DO) after graduate school. With that background, I'd rate a number of companies highly on the technology chart, but I particularly like Schlumberger and Baker Hughes (NYSE: BHI) for their technological strengths.

But before we go any farther let's take a look at some of the oilfield service companies that I think have bright future.

Company	52-Week High	8/19/2009 Close	Forward P/E
Baker Hughes	$82.88	$37.10	18.49
Diamond Offshore	$117.37	$87.22	9.01
Halliburton (NYSE: HAL)	$46.62	$23.63	19.17
Noble (NYSE: NE)	$53.14	$34.38	6.62
Transocean (NYSE: RIG)	$134.80	$74.59	6.47
Schlumberger	$100.00	$52.87	20.43

Source: Yahoo! Finance.

In my not-so-humble opinion, all the companies listed in the table represent opportunities for investment growth in the not-too-distant future. As you probably know, Transocean, Diamond Offshore, and Noble are offshore drilling contractors, with Transocean dominating the field -- er, the water -- with 136 rigs in its fleet. Of that number, 11 are in Brazil. Late last week, the company announced that the first of five members of a new class of ultra-deepwater rigs had begun a five-year contract for Chevron in the Gulf of Mexico.

And you likely realize that the other three companies in the table perform a variety of functions, including aiding integrated majors like Total or state-run operators like Mexico's Pemex as they search for and produce oil and gas around the world. Schlumberger is naturally the big magilla of the sector, with its 87,000 employees operating in about 80 countries. The company also operates 25 global research and engineering facilities making for the technological strength I discussed above.

The best bets to strengthen first
There are, of course, other quality members of the oilfield service group. But as the economy and the energy industry eventually both recover, the names above should lead the parade back to strength. And while there are still those who remain skeptical about the service sector, I believe that once it becomes clear that oil prices have topped $70 for keeps, there will be some solid profits to be made from the segment's leaders.

For related Foolishness:

• Halliburton Slides, but Will It Last?
• Baker Hughes Caps Off a Weak Oil Services Quarter
• Noble's Still Looking Regal