The U.S. oilfield services sector may be moving toward a positive environment, but the sustainability of exploration and production (E&P) spending “remains uncertain” because of weak natural gas prices and a continued oversupply, Moody’s Investors Service said Thursday.

Moody’s analysts revised the oilfield services sector outlook to “stable” from “negative” to reflect its “mix of relatively strong segments” including deepwater drilling and some weaker segments such as offshore logistics.

“Oilfield services companies supporting oil or natural gas plays with high liquids content should see enduring demand in 2010,” said Senior Credit Officer Pete Speer. “However, companies focused on North American natural gas plays could see a weaker second half of 2010 because of tepid natural gas supply-and-demand fundamentals.”

Overcapacity in the oilfield services sector has declined, which has stemmed price erosion and stabilized earnings and cash flows, the analysts said.

For the E&P sector, however, the outlook remains “negative,” said Moody’s analysts. Many E&Ps have to keep output and drilling “at high levels to satisfy equity holders and maintain their acreage positions” even with weak gas prices. The rising pace of drilling likely will increase oilfield services costs for the E&Ps.

“The high natural gas inventories will place downward pressure on spot prices and, combined with weaker futures natural gas prices, will cause margins and returns to tighten,” said Senior Credit Officer Ken Austin. “Meanwhile, new oil discoveries have become more complicated, resulting in increasing challenges and cost of development.”

Moody’s is maintaining a commodity price outlook this year of $4.50/MMBtu for gas and $75/bbl for oil. Analysts assume gas prices will rise to around $5/MMBtu in 2011, “then $5.50 thereafter.” Oil prices are forecast to be higher at $80/bbl in 2011.

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