North America's onshore natural gas markets continue to show signs of improving, and the rig count is forecast to be strong in the near term -- all positive factors for the oilfield services market, Barclays Capital analysts said last week.

Gas prices have been higher than expected and drilling results in the shales have been "extremely good," noted Jim Crandell and James West. In addition, oil drilling is gaining in the Eagle Ford and Bakken shales, a lot of gas being produced this year is hedged, and a considerable amount of gas drilling is being done to hold leases.

"This is causing tightening in supply/demand for quality 'fit-for-purpose' land rigs and for many services and equipment areas," noted Crandell and his colleague. "It's particularly true in pressure pumping where it is becoming difficult in some shale plays to find equipment. This is causing strong pricing improvement and should lead to earnings beats among companies with exposure."

Patterson-UTI Energy Inc. struck a $237.7 cash deal with Key Energy Services Inc. on Tuesday that would expand its pressure pumping services for hydraulic fracturing operations in the Barnett and Eagle Ford shales, and in the Permian Basin (see related story).

"The bad news in North America is that it is a short-cycle business, and we think that the second half of 2010 will likely represent a peak in terms of domestic rig activity," said the Barclays duo. "We are simply producing too much natural gas for the market. While a confluence of events have occurred which have pushed out the downturn in natural gas drilling, it has not reduced the chances that this will come."

However, a downturn would come from a "higher level of activity and earnings than we had previously estimated, and in general, we expect companies to have higher 2011 earnings from U.S. and Canadian land operations than we had previously estimated. We continue to de-emphasize North American leveraged companies, although not as emphatically."

The Barclays team is still concerned about the potential for lower gas prices in 2011 and reduced domestic gas drilling; "price and activity have both held up better than expected."

The deepwater is seen as a growth area for the services industry.

"While the Gulf of Mexico will come back in 2011 at a reduced level and remain below the prior peak, we do not see the strong outlook in the rest of the world being affected.

"From a shorter-term perspective, strong earnings from companies oriented to North American land markets, a near-term acceleration in many countries or regions internationally, and (hopefully) some possible news in halting the oil spill should provide catalysts."

Barclays upgraded the oilservice and drilling group to "positive" from "neutral" based on its findings. Halliburton, FMC Technologies and Pride International were upgraded to "overweight" from "equal weight," while Patterson-UTI Energy and CARBO Ceramics were upgraded to "equal weight" from "underweight."

In related news, Helmerich & Payne Inc. (H&P) last week agreed to build and operate seven of its trademark FlexRigs for U.S. onshore use by four producers under multi-year contracts.

The first of the seven rigs initially would operate in the Eagle Ford Shale and the other six rigs are scheduled for delivery at a rate of one a month through January. The names of the customers and the contract terms were not disclosed.

"We are encouraged by the renewed level of interest our customers are showing in signing multi-year term contracts to build and operate new FlexRigs at attractive dayrates and terms," said CEO Hans Helmerich.

H&P doesn't expect the new contracts to "significantly" impact its previously announced fiscal 2010 capital expenditures, which were estimated at $350 million. Since March 2005 the Tulsa-based company has committed to build 150 new FlexRigs at a total cost of about $2.4 billion.

H&P was forced to exit from Venezuela late last month, an issue that has plagued several U.S.-based producers.

"Our future is better reflected in [Tuesday's] announcement of additional new builds for paying customers under long-term contract," said the CEO.

At the end of June H&P's U.S. land segment had 170 active rigs out of a total fleet of 215 rigs. Of the 45 idle rigs, only 10 were FlexRigs, of which nine already had signed contracts and should return to work over the next two months. The 170 active rigs include 116 rigs under term contracts, four of which were new rigs waiting on customers that requested delivery delays.

H&P's existing fleet as of Tuesday included 215 U.S. land rigs, 28 international land rigs (excludes 11 nationalized rigs in Venezuela) and nine offshore platform rigs. Once the new builds are completed in January, H&P's global land fleet would include 200 FlexRigs.

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