The upturn that began for the oil and gas industry in 2003 is expected to last five to seven years, leaving two to four more years of strong growth ahead. That's not only good news for the industry in general, but for the oil-service sector in particular. This is the assessment of Mark S. Urness, oil-service analyst for Calyon Securities (USA) in New York, on the heels of a recent oil-service conference in Paris hosted by Calyon and its European sister-broker Cheuvreux. The unequivocally bullish views expressed by the managements of the five European and six U.S. service companies attending the conference "reinforce our view that the oil-services industry is enjoying the strongest and longest up-cycle since the 1970s," Urness says. This extended up-cycle is being driven by a confluence of events, including continued strength in global oil demand, challenges in replacing reserves and growing production, and high commodity prices, he says. "In contrast to the 1970s, when oil-price spikes were driven by supply shocks, today's high oil and gas prices are a product of strong global economic growth and limited incremental oil supply," he adds. Given this appraisal, he expects E&P capital expenditures and oil-service companies' revenues to grow more sharply in the 2006-07 period than had been previously forecast. "We now expect E&P capital spending to grow by 20% to 25% in 2006, up from our previous 15% to 20% estimate and compared to estimated year-over-year growth of 19% in 2005." Breaking this estimate down, he expects higher oil-service pricing to contribute 10% to 15% to spending growth this year, and activity growth to contribute 10%. In line with the latter observation, he projects the worldwide rig count in 2006 will rise to 3,025, up 10% versus 2005 but more importantly, the highest level of drilling activity in 20 years. In tandem with this revised outlook, oil-service revenues in 2006 should grow about 20%, and 15% in 2007, says Urness. Based on these projections, the analyst has raised his 2006-07 earnings-per-share estimates for nine of the 14 companies in his coverage universe and his stock-price targets for 11. This includes raising the 12-month target on Halliburton's shares from $75 to $81; Baker Hughes, from $67 to $77; and National Oilwell Varco, from $68 to $73. "The current valuations of oil-service stocks are not fully discounting the strong growth we envision through the 2007-08 period. Although the OSX has recently risen by more than 30% from the fourth-quarter 2005 trough, [service-sector stock] valuations remain highly attractive." On the basis of higher 2007 earnings-per-share estimates, he has also raised his 12-month target for the Philadelphia OSX from 233 to 253. "This provides potential remaining upside in the group of about 30%." His top service-stock picks for 2006 are Halliburton, Cooper Cameron, Grant Prideco and Transocean. The basis for these picks: Eastern Hemisphere growth, later-cycle equipment demand and strong deepwater fundamentals. (For more on current conditions in the oil-service sector, see "Service-Side Capacity" in this issue.)