This year should see strong growth for the oil-services companies that can operate in the expanding deepwater industry, says Elliott Gue, who shares two favorite picks.

Elliott, it’s wonderful to have you with us. Elliott, you’re one of our top energy experts and you’ve been in this field for quite some time with your Silk Road to Riches, talking about the impacts on commodity prices, oil, and natural gas, other energy. What do you see for 2013 in terms of the energy themes?

I think it’s going to be generally a good year for the sector. Last year was not a great year for energy, mainly because oil prices took a little bit of a breather, a little bit of a break.

But what we’re seeing in 2013 is that Brent oil prices, which is the key international benchmark, are up around $115, $116 a barrel. In the US, West Texas Intermediate Crude Oil is trading around under $100 a barrel, so there is a big price spread there. But outside the US, oil prices are very, very high. I think those high oil prices are going to generate lots of activity in drilling and production activity.

One area we’re seeing a lot of growth in 2013 is deepwater. There’ve been a number of major oil and gas lines in deepwater over the last few years. One area that is really hot is East Africa. This would be countries like Mozambique. The Italian firm Eni (E) actually found a field there that they think has as much as 30 trillion cubic feet of natural gas, which they’re going to develop in the form of liquefied natural gas. Off the coast of Tanzania as well, there’ve been a number of finds...and other areas as well.

Schlumberger (SLB) recently said in their earnings release that the Gulf of Mexico is actually bigger today than it was before the oil spill back in 2010. I think that’s another area you’re going to see a lot of growth, is these really deepwater and oil-focused investments abroad.

Very good. Well, give us a breakdown of the different areas. You’ve got energy services, which you just referred to. Then you’ve got the big integrated oil companies, and then you’ve got the individuals—everything from MLPs...Which areas are you most bullish about?

Well, certainly all of those areas are going to have certain stocks doing well. If you’re looking at the big services companies, I would tend to focus on those that have more international exposure.

The reason for that is that in the US, most of the service activity is targeting these unconventional shale fields. One of the most important services there is fracturing, basically pumping liquid into the rock to make fractures for the oil to flow through. That’s how they produce fields like Bakken Shale, the Ego Ford Shale.

The problem with that industry is there’s overcapacity. There’re too many companies built too many pump trucks to do this fracturing work, and so prices are coming down. There’s just more capacity than demand right now...but outside the US, we’re actually seeing activity really ramp up.

I mentioned the deepwater ramp up that we’ve seen in the Gulf of Mexico as well as outside the US, but also onshore activity in places like Saudi Arabia has been very strong. Russia...there’s a lot of spending going on in Russia.

That’s going to benefit Schlumberger more than the other major oil-services companies. The reason is that Schlumberger is much more internationally focused, has less exposure to North America, and about 30% to 40% of their North American business is basically the Gulf of Mexico and deepwater, which is the only area in the US that’s really seeing solid growth and service activity right now in pricing. I think they’re going to be advantaged internationally.

Schlumberger is a name you like and that’s the one you’re recommending right now.

Absolutely, and along the same themes, I like a company called Petroleum Geo Services (PGSVY), which like Schlumberger is involved in the seismic business. They actually use sound and pressure waves to map rock formations and look for new oil and gas finds...Schlumberger’s involved in seismic, but PGSVY is a pure play on that industry.

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