Riding an expected surge in demand for energy services

Global demand for fossil fuels remains robust and supply is tight in early 2023, which has led to elevated prices for energy commodities and incentivized energy producers to boost production, according to Fidelity’s Maurice FitzMaurice.

This presents a major opportunity for energy service providers, which are hired by oil & gas exploration & production companies to boost production, says FitzMaurice, portfolio manager of Fidelity^® Select Energy Portfolio (FSENX) since 2020.

“Oilfield services companies are seeing some of their best prospects for growth in a decade as demand for services ramps up,” he says. “Many market participants do not understand the capital investment needed to meet the world’s growing demand for oil and natural gas, and so they can underestimate the upside and duration of the upcoming business cycle for oilfield services.”

FitzMaurice believes many oilfield services companies have strengthened their businesses the past several years by reducing headcount and other costs and capacity. As demand for their services has increased, they are now experiencing solid pricing power.

“The oilfield services industry is known for its high, incremental profit margins,” says FitzMaurice, explaining that, when demand and pricing are strong, earnings can grow rapidly.

In 2022, exploration & production companies increased short-cycle U.S. spending on oilfield services by roughly 50%, while spending outside the U.S. grew much more modestly, he says. Despite this recent rebound in demand for energy services, a compelling opportunity remains, according to FitzMaurice.

“I expect at least several years of strong growth ahead for this industry,” the portfolio manager says. “This should include accelerating growth in non-U.S. spending led by national oil companies in the Middle East and continued but slower growth in U.S. spending. International and offshore oilfield spending takes longer to ramp up than in the U.S., given that projects often take three to five years to develop.”

As production growth from U.S. shale has slowed and with supplies from Russia increasingly at risk, other regions of the world, including the Middle East, Latin America, and Africa, will need to ramp up production to meet global demand for oil and natural gas, FitzMaurice concludes.

As of January 31, oil & gas equipment & services was the fund’s largest subindustry overweight relative to its MSCI sector benchmark, led by outsized stakes in Halliburton (HAL), TechnipFMC (FTI), and NexTier Oilfield Solutions (NEX).

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