The outlook for global independents is looking good, particularly for oil-focused operators, but headwinds still persist for the smaller sector of North America’s oilfield services providers, where a plethora of providers is chasing limited new demand, according to Moody’s Investors Service.

Moody’s credit rating analysts recently provided their take on the exploration and production (E&P) industry, as well as the oilfield services and drilling (OFS) market. The outlook for global E&Ps was revised upward to “positive” from “stable.”

Production is forecast to increase over the coming year to 18 months, which would more than offset a modest decline in crude prices from today’s lofty levels, analysts said in “Strong Oil Prices and Increased Operating Efficiency Give Producers Boost.”

Pricing assumptions were revised, based on the positive outlook, with West Texas Intermediate crude prices gaining $5.00/bbl to $90 for 2014. New York Mercantile Exchange natural gas prices remain unchanged at $3.75/Mcf.

“The positive outlook reflects expected higher production in 2014 and improved operating efficiencies derived from the application of new technology to both new unconventional and more established conventional resource plays,” Senior Credit Officer Stuart Miller said.

After this year, oil prices are expected to drift lower but remain at “relatively high levels” that would translate into strong cash flow for the E&P sector, which in turn would encourage further investments.

E&Ps, said Miller, should have enough cash flow and committed credit lines to fund planned capital spending through 2014, which would drive gross earnings growth by about 5% for the larger producers and more than 10% for the juniors.

Also assisting E&Ps are the costs for OFS, which are expected to “climb less steeply” in 2014. “Rig counts have stabilized and the demand for services has come into better balance with supply.”

There are persistent headwinds for operators exposed to North America’s onshore drilling and development, “where too many service providers are chasing limited new demand,” according to analysts.

“This imbalance will persist through early 2015, and once increasing efficiencies limit the need for additional rigs and equipment.” Halliburton Co., which has a huge market share in North America, is forecasting a steadily better business environment through the next two years (see related story).

And Moody’s expects the “biggest” OFS companies to see long-term profitable growth. However, those OFS companies with a smaller North American market share, including Nabors Industries, Key Energy Services, Basic Energy Services and FTS International, may come under operational pressure.

“Oil producers continue to shift their focus from pursuing new resources to increasing their returns on those they already have,” said Senior Analyst Michael Somogyi. “This change points to long-term growth for the larger, more geographically and technologically focused companies such as Schlumberger, Baker Hughes, Halliburton and Weatherford International, whose margins will widen.”

The near completion of many large midstream infrastructure projects also should alleviate the bottlenecks in the E&P sector, providing takeaway capacity to support more production, said Somogyi.

The stable outlook for the broad OFS industry reflects differing trends based on their geographies and service offerings, Somogyi wrote in “Headwinds in North America Temper Steady Growth in International and Offshore Markets.” The overall sector’s strong business fundamentals should carry the day, he said.

“Despite the sluggish global economy, persistently high oil prices and higher capital spending budgets underpin the industry’s current strength,” he said. “Demand for OFS services depends on the spending patterns of upstream oil and natural gas producers, and 2013 is the fourth consecutive year of double-digit spending growth.”