It is becoming increasingly apparent that Wall St. is keeping a sharp eye on companies in the oil service sector. As we reported earlier this week Deutsche Bank A.G. (NYSE: DB) upgraded the oil service sector. In its analysis, companies in all areas of the sector were doing well.

Companies across the oil universe, from large integrateds like Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) to independents like Apache Corp. (NYSE: APA) and Occidental Petroleum Corp. (NYSE: OXY), are aggressively pursuing exploration and production. There are very compelling reasons why. One is that China’s oil demand is expected to rise at a faster pace this year than previously forecast, thanks to an economic recovery.

China’s apparent oil demand, or crude processing plus net imports of refined products, rose for a second month to a record 10.6 million barrels a day in December, up 9.1% from a year earlier, according to data compiled by Bloomberg. Gross domestic product expanded 7.9% in the fourth quarter, compared with 7.4% in the previous period, snapping a seven-quarter slowdown, government figures showed Jan. 18.

The other catalyst seen for a rebound in the sector is a slow but sure recovery in the long-suffering natural gas market. While this recovery will not happen overnight, the Deutsche Bank analysts pointed out in their sector upgrade that it will play a part in the overall sector strengthening.

Industry leaders like Schlumberger Ltd. (NYSE: SLB), Baker Hughes Inc. (NYSE: BHI) and Halliburton Co. (NYSE: HAL) all have turned in solid earnings for the fourth quarter. Leaders posting strong numbers and oil companies upping their capital expenditures are a winning combination for a sector that struggled last year.

Despite reasonably consistent oil prices and an increasingly favorable overall tolerance for risk, the oil service sector had an ugly year in 2012. After a disastrous first half of the year, the sector rallied in the second half to end the year down just over 2%. That was extremely disappointing in a year in which the S&P 500 as a whole had double-digit gains, as did many of the sectors.

On Thursday, Barclays PLC (NYSE: BCS) upgraded oil services, citing rising demand and very fair valuations in the sector. The analyst at Barclays point to a proliferation of offshore drilling, not only in the deepwater portions of the Gulf of Mexico but all around the world.

With a backdrop for firm pricing, Barclays initiated three names at overweight. Atwood Oceanics Inc. (NYSE: ATW), which closed yesterday at $52.48, has a price target of $68. Thomson/First call estimates are at $55.50. Ocean Rig UDW Inc. (NASDAQ: ORIG) has a price target of $31. It closed yesterday at $16.32 and the street target is at $22. If this pick is on the mark, that is a potential gain of 90%. Lastly Barclays boosted Pacific Drilling S.A. (NYSE: PACD) to Overweight with a $14 price target. It closed at $10.42 yesterday, and the street consensus is $12.

Due to recent exploration successes, high commodity prices and the further globalization of offshore drilling, analysts estimate offshore drilling spending will rise 61% from 2012 levels to $200 billion by 2015. Not all areas of the oil services sector are expected to see that kind of explosive growth. But with west Texas intermediate (WTI) above $95 and Brent crude near $114, oil service sectors should see steadily increasing business from the oil producers.

Investors looking to have broad sector exposure may want to consider owning the Market Vectors Oil Services ETF (NYSEMKT: OIH). This provides diversification with a basket of quality names.

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