As energy companies look at hard-to-reach areas to squeeze out oil, oil services sector stocks and related exchange traded funds will capitalize on the greater need for specialized expertise and technologies.
Year-to-date, the Market Vectors Oil Services (NYSEArca: OIH) is up 14.0% and iShares Dow Jones U.S. Oil Equipment Index ETF (NYSEArca: IEZ) rose 14.7%, outperforming the broader S&P 500 energy index, which increased 9.5%.
“The investment thesis for taking a stake in OIH is likely motivated by the fact that the incremental barrel of oil being produced is increasingly coming from areas (deep water, oil shale, the Arctic) that demand more services expertise and technology,” according to Morningstar analyst John Gabriel. “Such a dynamic supports healthy long-term industry trends and pricing power.”
More energy firms are venturing into the deep seas to tap into offshore hydraulic fracturing, or fracking, potentially accessing billions in potential revenue, Bloomberg reports. [Energy ETFs Keep Hauling in Cash]
“It’s the most challenging, harshest environment that we’ll be working in,” said Ron Dusterhoft, an engineer at Halliburton Co. (HAL), said in the article. “You just can’t afford hiccups.”
In the Gulf of Mexico, wells that cost almost $100 million to drill are off more than 100 miles from the coast and reach depths of a mile or more. [Energy Services ETFs Find Support From Record Oil Rig Demand]
Oil service providers, such as Halliburton, Baker Hughes (NYSE: BHI), Superior Energy Services (NYSE: SPN) and Schlumberger (NYSE: SLB), have been capitalizing on the surge in offshore projects, selling fracking gear to some of the largest energy producers. Combined, the four companies make up about 40.6% of OIH and IEZ.
Over the two year period ending 2015, fracking in the Gulf of Mexico is expected to rise over 10%, according to Douglas Stephens, president of pressure pumping at Baker Hughes.
Due to rising demand for offshore fracking, oil services companies have expanded their fleet of fracking ships by 31% since 2007. Meanwhile, advances in technology could allow the pumping horsepower used by fracking wells to rise another 28% by the end of 2018 to 1.2 million horsepower.
Market Vectors Oil Services
For more information on the oil services sector, visit our oil services category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.