If you've been dismayed recently by the downward spiral or, at the least, sputtering in service-stock market values, don't head for the exits yet. The upcycle for this sector is likely far from over. True, the research department at Banc of America Securities in early March reduced its 2006 composite spot gas-price forecast to $6.75 from an earlier $7.75 and cut its stock-price targets for BJ Services from $43 to $38; Patterson-UTI Energy, from $39 to $35; and Pioneer Drilling, from $21 to $18. Meanwhile, it gave modest market downgrades-$2 per share on average-to Baker Hughes, Halliburton and Schlumberger. However, other market-maker seers, with a longer-term perspective on revenues, earnings and industry fundamentals, are far more sanguine about the service group. Mark Urness, service analyst for Calyon Securities (USA) Inc. in New York, recently boosted his year-end 2006 target for the Philadelphia Oil Service Index (OSX) to 265 from 253-based on increased revenues and earnings estimates for the service stocks under his coverage. "This provides potential remaining upside in the group of about 35%," says Urness. Sharp increases in upstream capital expenditures should drive oil-service revenue growth above consensus estimates in 2006 and 2007, he believes. "We now expect revenue growth for service companies to average 25% this year and 18% in 2007 compared to our previous estimates of 20% and 15%, respectively." Schlumberger head Andrew Gould has indicated he expects his company's 2006 revenue growth to be similar to the 24% top-line gain that firm achieved in 2005. Weatherford head Bernard Duroc-Danner says he anticipates 2006 revenue growth for his company to be in the 30% to 35% range, aided by its Precision Drilling acquisition. Meanwhile, Baker Hughes is forecasting revenue growth of 19% to 21% this year. Says Urness, "Following a plethora of positive surprises in fourth-quarter 2005 [earnings] results, and even more aggressive than anticipated revenue guidance from companies such as Schlumberger and Weatherford, we have raised our 2007 earnings-per-share estimates for eight of the 10 OSX components in our coverage universe." He points out that global drilling activity is moving higher, with an estimated 250 to 300 new land rigs expected to enter service during the next 12 to 18 months while 70 new offshore rigs are under construction. The worldwide rig count in 2006 is expected to rise 10% versus last year, to 3,025 rigs-the highest level of drilling activity in 20 years. Pricing, he says, is expected to contribute an additional 15% to top-line growth for the oil-service industry. Nonetheless, "current oil-service stock valuations aren't fully discounting this upside." Urness' top service-stock recommendations are based on three industry themes: Eastern Hemisphere growth, later-cycle equipment demand and strong deepwater fundamentals. Those picks include Halliburton, Cooper Cameron, Grant Prideco and Transocean. "At this stage, we definitely have a preference for [service] companies with significant international and oil-driven exposure, as opposed to North American, natural gas-focused companies." Michael K. LaMotte, oil services and equipment analyst for JP Morgan Securities in Dallas, contends that the offshore drilling market with the greatest upside versus Street expectations is the premium jackup market. This is particularly true in areas that look to be very undersupplied during the next 12 months, including the Asia-Pacific, Indian Ocean, West Africa, North Sea and Arabian Gulf markets, he says. Given this view, LaMotte recently upgraded to Overweight the shares of Ensco International. With only 31% of its jackup fleet priced for 2007 versus an average of 47% for its peer group, the company has attractive earnings upside, he says. "We estimate that each $5,000-per-day increase in jackup rates adds 27 cents to 2007 backlog-adjusted earnings per share. This is important as international jackup rates continue to move higher, suggesting Ensco has one of the greatest opportunities for positive 2007 earnings-per-share revisions." In addition, he says, Ensco was recently trading at an 11% discount to its peer group. Offshore drillers under his coverage with the greatest earnings-growth profiles: Overweight-rated Noble Corp. and Rowan Cos.