The oil-service sector is the first to see declines in business ahead of E&P industry slowdowns, and the first to see orders in advance of upturns. Oil and Gas Investor asked service-sector analysts for their takes on companies likely to ride the current development wave as oil prices top $90 a barrel consistently and global demand remains firm.

Marshall Adkins, managing director and head of energy research at Raymond James & Associates, has a fairly upbeat view of oil services. “Overall, our oil-service outlook for 2011 is relatively positive, despite what we think will be a weak gas-price environment in the U.S.” The clearing price for gas is below $5 per thousand cubic feet (Mcf), and could go “sub-$4,” with a chance for weather to push it either way.

Buoying the industry is a strong global oil price driving drilling. “The transition to oil and oil-driven horizontal work will overcome the modest fall-off in gas-related activity.”

Adkins predicts the more service-intensive horizontal oil segment will pick up 30% in 2011, pushing gains for related companies and treating North American oil-service companies “unusually well,” despite weak natural gas prices. He believes businesses solely servicing the offshore, especially domestically, will continue to face challenges. Permitting in the Gulf of Mexico is still slow, and the regulatory environment is uncertain.

Here are the analysts’ picks.

National Oilwell Varco Inc.

“The transition to oil and oil-driven horizontal work will overcome the modest fall-off in gas-related activity,” says Marshall Adkins, managing director and head of energy research, Raymond James & Associates

This large integrated service and products provider to the global oil and gas industry (NYSE: NOV) has analysts talking.

“Our single favorite name right now is National Oilwell Varco,” says Raymond James’ Adkins, who figures robust oil-drilling activity factors heavily for NOV. “A little less than half its business is driven by drilling activity that should stay robust in 2011.” The analyst cites “a flood of new-build orders across the board” as the single biggest contributor to NOV’s rising stock price. His target is $90 per share.

Brian Uhlmer, managing director and senior analyst for Global Hunter Securities’ Energy Group, takes a similar view. “We think that a lot of people own this name because of the floaters (floating production, storage and offloading units). We like that too, but it makes well-servicing rigs at about $1 million apiece, coil-tubing units at $3 million apiece, and land rigs at $16- to $18 million.” Several hundred of each will need to come online shortly, playing to NOV’s strength.

Madison Williams’ managing director and head of oilfield services research, Jeff Spittel, sees advantages in NOV’s offshore-targeted business. “Really, its benefit right now is largely from the offshore-rig-construction cycle that started again a couple months ago. It is an indirect beneficiary of QE2 (quantitative easing) in a big way, and financing terms for the shipyards are pretty solid right now.”

NOV has many equipment lines selling to new-build offshore rigs, which companies are ordering at a discount to the last cycle, says Spittel. His target for the stock is $78.

“We are starting to see substantial tightening in the premium pipe and premium threaded-connection business, and we believe margins are going to increase dramatically…,” says Brian Uhlmer, managing director and senior analyst, Global Hunter Securities.

The switch from gas to oil drilling is not the only piece of NOV’s value proposition currently. Says Uhlmer, “It is in a lot of markets where there are only two to three players. With modest improvements in the market, you get pretty good improvements in pricing power.” Uhlmer points to the recent Grant Prideco Inc. and Advanced Production and Loading Plc (APL) acquisitions as revenue-growth areas.

“We are starting to see substantial tightening in the premium pipe and premium threaded-connection business, and we believe margins are going to increase dramatically in that business back towards 2008 levels.” Similarly, with the acquisition of Norwegian APL, a designer and manufacturer of turret mooring and other FPSO-related equipment, NOV again is in a market with only two other competitors.

“The FPSO market will be a robust market,” Uhlmer concludes, “and could turn into fairly substantial orders in the back half of 2011.”

Acquisition for its own sake is not what fuels NOV’s stock price, says Adkins. Rather, its ability to drive free cash flow and earnings from those businesses in short order is what generates value for shareholders.

“NOV has a unique ability to turn acquisitions that for other companies may be dilutive or mediocre, or maybe even value-destroying, into value-creating, highly accretive acquisitions. It does this by integrating these companies and their products and platforms into the wider NOV platform.” In a short period of time, NOV manages to synthesize these companies into its system, massively increasing earnings.

“While it may pay six or seven times EBITDA for a company that’s been operating on its own, by the time that company’s been incorporated into the NOV system two or three years later, the earnings have doubled or tripled. So, NOV’s really only paid two to four times EBITDA.”

Uhlmer, who recently joined Global Hunter Securities from Pritchard Capital, picked NOV last May when it was trading in the mid-$30s. After more than doubling, NOV still has room to grow.

Schlumberger Ltd.

John Lawrence, vice president in the oil-service research division for Tudor, Pickering, Holt & Co., picks Schlumberger (NYSE: SLB), another large diversified oil-service company, as a stock to watch. He considers the company the gold standard in the international oil-services market, noting that international growth and, to a lesser degree, a domestic restructuring offering cost savings and revenue generation, will drive growth in 2011.

He also thinks the Smith International acquisition is on track. “We think that’s going quite well. There are more gains as far as synergies there, not just on the cost side but on the revenue side. We think it can push some products through its international distribution network as well.”

The company’s financials look good. “Importantly, the balance sheet continues to get a lot better. We think it has plenty of capacity to significantly raise the dividend or announce pretty big share buybacks.” The stock has been trading in the mid-$80s, yet Lawrence foresees more value. “There’s still some decent upside, despite the huge run since August.” His target is $100. “It’s a name we like a lot.”

Halliburton Co.

Adkins likes Halliburton (NYSE: HAL), despite current uncertainty about a possible glut of new pressure-pumping capacity. He has a $55 target on the stock, noting that while the stock-price-rise window is not entirely short term, pressure pumping will be quite profitable into the future. “You are going to see investor-sentiment headwinds as people call for an end to the pressure-pumping cycle.”

Adkins’ insight into the equipment market shapes his outlook. “We don’t think you are going to overbuild equipment in 2011, because people underestimate equipment-attrition rates.” Despite this and the resulting short-term volatility, Halliburton is due for gains. “The fundamentals will, over time, outpace the negative sentiment and the stock moves higher over the course of the year.”

Lawrence, of Tudor Pickering, has reservations about Big Red, while noting its positives. “It is doing a lot better internationally than it is getting credit for. The valuation is quite reasonable,” he says.

“I think that from a profitability perspective you don’t see the pricing degradation maybe that you’ve seen in past cycles. Given its integrated offerings, margins should hold up decently. But that being said, there is a potential for downside from the margin perspective.”

Pumping capacity also concerns Lawrence. “It’s a really tough number to get your hands around as far as capacity adds.” The picture of equipment is unclear and data is elusive. “A lot of it is just anecdotal. We are assuming maybe 10 million horsepower by the end of 2010 and maybe we are adding 3 million horsepower throughout 2011. But that’s just our best guess.

“There’s some manufacturing capacity that we don’t have a very good handle on, and we don’t think anybody does.” He forecasts these circumstances will converge to depress pressure-pumping prices. “The pressure pumpers won’t be able to push price like they did in 2010.”

Rowan Companies Inc.

An offshore driller makes the short list, despite the local post-moratorium malaise. International premium jackup operator Rowan (NYSE: RDC) is a stand-out for Tudor Pickering’s Lawrence, although the offshore drilling industry on the whole is not compelling. “It’s not a space we are extremely bullish on given the capacity announcements.” Not surprisingly, Lawrence says his firm is modeling flat day rates for the time being. Nevertheless, high-spec rig demand underpins Rowan’s growth potential.

International premium jackup operator Rowan is a stand-out for Tudor, Pickering, Holt & Co.’s John Lawrence, vice president, oil-services research division.

“We do like Rowan. We really like their fleet as far as premium jackups.” When combined with earnings growth derived from the new high-spec jackups due from last year’s Skeie Drilling acquisition, Lawrence thinks Rowan’s earnings growth could be 60% in 2012, compared to its peers’ typical earnings growth of closer to 10%.

Finally, he says, Rowan is sitting on a couple of marketable business units, specifically rig manufacturer LeTourneau and its land-rig business. A sale of these assets could provide a cash infusion and bolster Rowan’s balance sheet.

“Potential proceeds from there are close to a billion dollars. When Rowan gets into 2012, it will have a fantastic balance sheet. With the new rigs coming out, it will be throwing off a lot of cash, and thus can raise the dividend, buy back some shares, or build more rigs.”

OYO Geospace Corp.

“It has by far the best wireless seismic product on the market,” says Brian Uhlmer of Global Hunter Securities in picking OYO Geospace (Nasdaq: GS: OYOG). Uhlmer admits the company’s stock has had a huge rise in the past couple of years but thinks there is still room to run. In a recent field test against competing wireless-seismic-acquisition systems, OYO Geospace’s technology won out. Uhlmer says OYO has been marketing its Geospace Seismic Recorder technology for years but only recently got its big break.

“At the end of last year, Dawson Geophysical, the biggest land-seismic company in the U.S., started buying up the product.” Not only did Dawson turn into a repeat buyer, but it has negotiated for OYO to begin building some bigger systems and renting them to Dawson for larger seismic shoots.

“The most interesting thing is Dawson is using this wireless stuff in Nacogdoches (Parish). It’s not like it is using it in some rocky terrain or a jungle where wireless is your only option.” Uhlmer says the technology is so good, the operator is using it in spite of the traditional downsides of wireless: battery life, unit durability and data throughput and quality.

“It is using it on a plain-vanilla seismic shoot, which to me is a good indicator that the product works so well that even where it doesn’t make that much difference in time savings or complexity, an operator wants to use it because it’s better.” Further, OYO also just sold a complete system into China, a market that has yet to be quantified.

OYO has also entered a new market with its “borehole” technology.

“It has taken its seismic technology and used it for frac monitoring,” notes Uhlmer. OYO puts a geophone on a wireline, and gives pressure pumpers a view of their frac.

“Basically, when you frac a shale, you can tell where the frac ends by the sound waves that bounce back off the water hitting the end of the frac. You can map where your frac goes.”

The frac operator can then tailor horsepower, proppant or other variables to improve the job and get better hydrocarbon flow. But Uhlmer sees an additional reason OYO is beginning to sell this technology: it’s a way to combat environmental accusations against oil and gas operators in the shale plays.

“Now the application is kind of a backup for litigious purposes. When people say you are fracing into their water table, (pressure-pumping companies) are ordering it and want it on site for more and more fracs. It’s a legal defense.” Halliburton and Schlumberger have bought several of these units between them, and Uhlmer says it is a high-margin line for OYO.

Combine good margins with a short lifespan resulting from harsh conditions in the wellbore, and Uhlmer sees a repeatable business line. The borehole implementation is getting a small run in China right now, which could open more doors. Uhlmer has a target of $114 for OYOG, a stock he thinks is a bit under the radar and somewhat tightly held.

Oil States International Inc.

Analysts like Oil States (NYSE: OIS) for its oil focus, strong management team and unique business line of remote lodging, or accommodations at well locations.

Says Lawrence, whose target for the stock is the mid-$70s, “There are five product lines, but we’d say 75% of the business is levered to oil, which we like quite a bit. It also has some interesting products in its offshore business, which also gives it oil exposure.” Oil States’ largest business is accommodations, which Lawrence says accounts for nearly half of its EBITDA. “This is a pretty unique business, with very decent returns. EBITDA margins are upwards of 50%, and as far as growth in that business, it’s upwards of 20% in 2011.”

The accommodations business is focused on the Canadian oil sands, a business benefiting from the wide ratio between oil and gas prices. According to Madison Williams’ Spittel, “If you look at cost profiles and the economics of in-situ oil-sands projects, natural gas is one of your major input costs, and oil of course is the output. It’s a good way to indirectly play a $4 natural gas strip and an $80 oil price.”

Both analysts like the company’s recent acquisition of the MAC Group, which has a similar accommodations business, but in Australia. It sells into a basket of mining, mineral and energy industry clients. This gives the company regional and industrial diversification in its core business. In accommodations, Oil States’ major competition is customer insourcing, offering additional growth potential.

“In Australia, the MAC is probably 10% to 20% (of the market) and 80% to 90% is customer insourced. There is a lot of room for the company to demonstrate the value proposition and grow its footprint there.”

Spittel also likes the company’s deepwater-production-oriented products. He looks for upside from deepwater exploration in Brazil, West Africa and the sanctioned Gulf of Mexico projects already in play. His target is $73, and right now, “the stock is dirt cheap.”

The cornerstone of oil-service-sector growth in 2011 is pricing that Adkins terms ‘healthy and improving,” and fleshing out the timetable for a true activity comeback in the Gulf of Mexico.

“Our take is we’d probably be incrementally more bearish on gas than consensus and incrementally more bullish on oil than consensus, but directionally I think the market’s got it right and I think the stocks will react over the course of the year to that.” He stresses that investors should watch earnings reports and remember black swan events can still happen.

Lawrence also has a generally positive outlook on oil services, forecasting a 10% rig-count growth both this year and in 2012. He prefers companies with international operations to offset sluggish North American growth.