Broker Evolution Securities believes that a downturn for oil service companies is inevitable, but it will be short and sharp, and that recovery is likely to be equally rapid and certainly apparent in 12 months.
It says in a research note on the sector that it believes investors should focus on well-positioned technology companies with key products and services for large deepwater developments.
The firm also advises a focus on engineering and construction companies with exposure to large energy-related projects, especially in the Middle East, funded by national oil companies.
These account for more than 70% of proven global reserves and more than 40% of upstream investment.
It said: “The outlook for 2009 for oil service companies is clouded by the impact of lower oil and gas prices on capital spending and financing difficulties for projects.
“There is no doubt that a slowdown will occur – but its effects will be variable in both geography and industry sub-sector. North America is already suffering from a rapid scaling back of drilling for gas, while in Canada many oilsand expansion projects are delayed.
“As a result, seismic, shallow water drilling, onshore drilling and drilling-related business are likely to be most affected.
It added, however, that national and international oil companies appeared to be maintaining capital spending, in contrast to small independents, with a focus on large and deepwater projects.
“In addition, there are signs that the bottleneck of engineering and construction projects, especially in the Middle East, created by rebidding to reflect lower raw material prices, is already starting to unblock.”
Evolution says the consensus for oil company plans this year is for a 10-12% drop in international exploration and production spending and a more significant drop in spending in North America and Russia of 20%.
In the North Sea, it expects the activity of UK independents to be “soft”, with an emphasis on efficiency and cost control. Trade body Oil and Gas UK has already said wells drilled in UK North Sea could be down by one-third in 2009 on last year.
The broker says: “We have tested our assumptions through a sensitivity of revenue and margin and still find most companies do not look expensive even on a ‘worst case’ scenario.”
Among the firms examined by Evolution are AMEC, Hunting, Petrofac and Wood Group, each of which is given an “add” recommendation.