Weak natural gas prices and regulatory uncertainty — stemming from the Deepwater Horizon accident in the Gulf of Mexico — cloud the outlook for oilfield service (OFS) companies over the next year to 18 months, Moody’s Investors Service said in a report last week.

Until recent events, OFS earnings had been improving, but there’s uncertainty ahead.

“While we view the oilfield services sector as stable globally, the individual product lines and geographic markets are a mixed bag of strengthening and weakening demand,” said Peter Speer, a Moody’s senior credit officer.

Exploration and production (E&P) company budgets are up, and producers have stepped up drilling because of attractive oil prices and gas price hedging. There’s also a “pressing need” to drill expiring gas shale acreage, which has led to more activity.

“Rig counts, the sector’s highest-profile indicator of development activity, continues to rise steadily from their mid-2009, six-year lows,” noted Moody’s.

“Overcapacity in the OFS sector has declined, stemming price erosion and stabilizing earnings and cash flows. E&P companies have experienced rising costs for certain services, such as pressure pumping and higher specification land drilling rigs — another sign that the industry’s capacity is aligning with demand.”

On those factors, OFS companies supporting natural gas and oil development with high liquids content “should see enduring demand in 2010,” noted the analysts. “Those focused on North American natural gas plays could see a weaker second half of 2010 due to tepid natural gas supply/demand fundamentals.”

In the offshore markets, the Moody’s team expects to see demand for shallow-water jackup rigs to remain stable while demand for “midwater” rigs will continue to weaken. In the deepwater, declines in dayrates are expected as uncontracted new rigs reach the market in 2010 and 2010.

“The sector could be moving toward a positive environment, but we have doubts about the sustainability of North American E&P spending amid weak natural gas prices and a continued oversupply,” said the analysts.

“We also have concerns regarding increased regulatory risks stemming from the Deepwater Horizon accident and other onshore drilling developments” (see related story).

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