Second-quarter revenues for oil-service firms were through the roof. Of 27 service companies on the Oil and Gas Investor This Week scoreboard, all posted revenue growth compared with the same period last year, and nearly half reported 40% or more growth. Is it too much to expect repeat performances in the coming quarters? Some analysts answer "no." "With accommodating macro energy fundamentals, improving E&P cash flow generation and balance sheets, and relatively low E&P cash-flow-reinvestment ratios, coupled with increasingly acute oil-service capacity constraints, we continue to believe that we are in the relatively early stages of a prolonged expansion in drilling activity," analysts at Simmons & Co. International have reported. "Thus, we believe that Street estimates for the oil-service sector continue to be too low and that oil-service stocks are cheaper than they look, especially given the unrestrained pricing leverage and corresponding profit acceleration presently enjoyed by the service and supply industry." Several companies on the upper half of the scoreboard are making moves that are reflections of the whole group. National-Oilwell Varco Inc.'s log of new orders more than doubled sequentially to $735 million in the second quarter, pushing its backlog up to $1.2 billion, reports Kevin Wood, an analyst with Susquehanna Financial Group. He rates the shares Neutral. Dayrates for Grey Wolf's lower-end rigs have improved by $800 during the second quarter, while higher-horsepower rigs experienced a $2,000 gain, says Robert E. Ford, an analyst with Sterne, Agee & Leach. In late April, he adds, Grey Wolf had 37 rigs at work under term contracts; the company now has approximately 50 rigs under contract with an average length of 12 months, and he expects the number to increase to about 58 by the end of the third quarter. He has a Buy on the shares and a $10 target. Offshore, Lewis W. Kreps, an analyst with Aperion Group LLC, expects Diamond Offshore's backlogs to increase at higher-than-current dayrates as the year continues. "We are reiterating our Buy rating at present price levels and believe investors should include Diamond in their energy portfolios," Kreps says. His 12-month target price is $107.50 per share. For the near term, Standard & Poor's associate Jeffery Morrison says the general outlook for the service sector's debt ratings is positive. "Elevated crude and natural gas prices, increased spending by the majors, NOCs (national oil companies) and independents, and rising domestic and international rig counts are all positive catalysts and trends," he said at S&P's recent oil and gas conference in Houston. "Increased product and service demand and improved pricing and operating margins are also factors." Henry Hub prices have shot up from $5 per million Btu to more than $11. West Texas Intermediate spot prices have gone from $30 per barrel at the start of 2004 to more than $65 per barrel in recent months. "Strong hydrocarbon pricing and increased E&P spending is driving increased oilfield activity," Morrison said. Worldwide rig counts are up 16% year-over-year; international, 12%; and North American, 15% to 20%, he added. Simmons analysts report that the most attractive industry themes are the capital-equipment and upgrade-and-replacement cycle, the revival of exploration and seismic activity from historically low levels, the secular expansion in international oil-service activity, and the staying and cash-flow-generating power of deepwater-drilling activity. Morrison's near-term concerns for the service group revolve around potential labor shortages, spiking prices for raw materials and the ability to add rig capacity, though he said many producers will start supporting rig construction to ensure that exploration efforts move forward. For the long term, Morrison said maturing basins and brownfield recovery will increasingly be in focus. "Worldwide reserves decline about 8% each year, so recovery methods from existing fields are very important." He also anticipates a geographical shift into Russia, West Africa and the Middle East and for NOCs to grow in importance as a customer group. In looking ahead to the third quarter, the Simmons analysts say the service group's earnings momentum will continue to be "the story." "Look for a very strong third-quarter earnings season, especially from companies with pronounced exposure to Canada, the Eastern Hemisphere and pressure-pumping services." They expect Hurricane Katrina may take some steam out of the group's earnings, but it will not be as apparent until second-half reporting begins.