Why Oil Services Stocks Could Heat Up: Emerging Markets

Offshore oil rig
Offshore oil rig

With bitter congressional elections just weeks away, the political aspect of every issue is grabbing the spotlight as both parties search for an advantage. Deepwater drilling is an obviously potent target given the Obama administration's recent relaxation of restrictions following the BP (BP) oil-spill disaster earlier this spring.

Investors should ignore the political posturing, though, and look at the bigger picture. As rapid economic development and a population boom take place in the developing world, oil will play an increasingly vital role. And as easy-to-reach supplies run out sooner than is widely thought, pushing into more out-of-the-way reserves will become increasingly inevitable, experts point out.

That's a cue for investors to take a look at major oil-services companies like Schlumberger (SLB), Weatherford (WFT) and Baker Hughes (BHI) that stand to benefit from the rising costs of oil exploration. Investors should also take the big claims made by alternative energy sources with a grain of salt.

Strong Demand in Developing Countries

"The broad trends in the energy markets are a shift in power from developed countries to emerging markets like China and India," says Elliot Gue, an analyst at The Energy Strategist and coauthor of The Rise of the State: Profitable Investing and Geopolitics in the 21st Century.

Gue notes that oil consumption has stagnated over the last decade in the developed world and has dipped during times of economic downturns. But the rapidly developing economies in the emerging markets have demonstrated strong demand despite downcycles.

Indeed, it's hard to overlook the scramble to secure energy resources taking place in fast-growing emerging markets. Earlier in the month, China Petrochemical turned heads when it paid a massive premium to secure Brazilian oil resources, and Chinese companies spent a record $32 billion on energy resources abroad.

"Even if global oil supply overall hasn't peaked," Gue says, "producers continually have to go to more technically complex sources like deep water." And these more complicated and expensive developments "play right into the hands" of oil-services companies, Gue notes.

Where Alternative Energy Fits

But what about the green energy movement? Despite all the hype surrounding renewable energy, Gue cautions that sources like wind and solar are still a long way from matching the efficiency of traditional methods. A push toward austerity in Europe could create an even more uphill battle for these emerging technologies.

Indeed, the biggest power generators in Germany -- among the most aggressive country in providing green energy subsidies -- are now warning of sharp rises in surcharges over the next year. Germany's generous subsidies may well face pressure amid broader cutbacks elsewhere.

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While frequently maligned in the U.S., nuclear technology has far more potential to cut carbon emissions and provide cost-effective energy, Gue says. Not surprisingly, that potential seems to be getting harnessed much more aggressively outside the U.S. While the U.S. is considering building another nuclear plant, China is in the process of constructing 23, Gue points out.

France is already using nuclear energy to provide 80% of its power needs. Thanks to a more centralized model of deployment, the country has managed to standardize nuclear plants, which helps keep costs down. France has among the lowest power costs and emissions per capita in the developed world as a result. "The public is proud of it and thinks nuclear is a good thing instead of worrying about it," Gue says.

As political battles in the U.S. heat up, the rhetoric surrounding green jobs versus tapping into more oil is likely to escalate as well. But investors would be better off paying attention to the hard facts instead: Oil isn't going away anyway time soon.