A substantial and potentially prolonged downturn in the demand for global drilling and oilfield services — particularly onshore North America — led Moody’s Investors Service last week to lower its outlook on the sector to “negative” from “stable.”

“Lower oil and natural gas prices and the difficult credit market conditions have led oil and gas producers to significantly pull back their capital expenditures,” said Moody’s Vice President Pete Speer. “Earnings will steadily deteriorate over 2009 as oilfield services companies contend with rapidly declining utilization and weak pricing for their services.”

The outlook includes Moody’s expectations for the fundamental credit conditions in the industry over the next year to 18 months, but it does not consider the expected balance of ratings changes during this timeframe, the credit analyst noted.

An ongoing decline in demand for natural gas and crude oil “and the detrimental effects of the global recession reduce the likelihood of meaningful recovery in commodity prices in the near term,” Moody’s stated. “This poor outlook for prices combined with oil and gas producers’ need to preserve liquidity and reduce debt levels makes it likely that this downturn for oilfield services will extend into 2010. A rebound in services demand will lag an improvement in commodity prices until producers, particularly the independent exploration and production companies, are confident that price increases are sustainable and that they have sufficient visibility in demand trends.”

“Oilfield services and land drilling companies focused on North America will be the most challenged,” Speer said. “The major oilfield services companies and offshore drillers have more exposure to international and deepwater markets, which should provide more durability in their performance.”

North American onshore activity has declined the most to date and likely will see further significant declines, said Moody’s. International markets “have weakened somewhat but should hold up better since that activity is driven by national and international major oil companies” that tend “to be less commodity price sensitive and more focused on long-term production goals. Those companies also drive much of the offshore deepwater drilling activity, and therefore we expect that market to be more resilient. Shallow water offshore drilling markets will continue to weaken, particularly the Gulf of Mexico.”

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