Energy service stocks are staging a breakout in relative performance terms. Initially, this breakout may be met with skepticism, because there is a camp still expecting a sharp downturn in profitability, on a par with past boom/bust cycles. Our view remains that drilling activity has entered a phase that will see reduced amplitude in cycle volatility and an extended duration compared with recent history. Already, industry pricing power gains have stayed at a high level, breaking the pattern of severe busts after a period of rapid expansion. This is supportive of persistent profit strength. In addition, the collapse in industry valuations is set to reverse. The relative P/E has diverged significantly from the number of active drilling rigs as previously shown, opening an unprecedented gap. On its own, the latter points to an undershoot. A pick up in energy consumption growth this year should provide investors with incentive to increase the multiple they are willing to pay for this group. Stay overweight. http://www.bankcreditanalyst.com/