Moody's says prospects better for oil services industry

Improving fundamentals have created a generally stable to positive rating outlook for the oil services industry, according the Moody's Investors Service annual outlook for the sector.

Moody's also said it thinks consolidation among these companies will continue.

"We expect the overall sector to recover by the end of 2001, based on strong oil and natural gas prices and higher budgeted capital spending by major oil companies, national oil companies, and independent E&P companies," said Alexandra Parker, Moody's vice president and senior credit officer.

She said the hot natural gas market in North America has been leading the recovery, although, in the near term, the rate of growth in natural gas drilling is likely to slow due to labor and equipment constraints. She said international markets are still lagging behind the recovery in North America, and deepwater markets are lagging behind the shallow water and onshore markets.

As major and independent oil and gas companies increase exploration and development spending outside of North America, Moody's expects all the markets to improve during 2001, and the international oil services market to recover fully by the end of the year. Moody's projected oil and gas producers would raise their capital spending by 15-20% in 2001, as compared to an estimated 10-15% increase in 2000, and a 22% drop in 1999.

Overall, Moody's believes rig utilization and day rates may return to their last cyclical peaks of 1997-1998 sometime in 2001-2002.

Partly behind the expected increase in exploration and development spending, Parker said, are the "lofty levels" of oil prices. "While we do not expect these levels to be sustainable," she said, "we believe that they are likely to remain in a range that will encourage international investment in the near term."

The favorable outlook for US gas prices will also promote greater capital spending by oil and gas producers. Supporting prices at levels above their historical average, Parker says, will be high reserve depletion rates, the rising demand for gas-fired power generation, low storage levels, and concerns about possible gas shortages.

Exploration and production companies will favor service companies that can offer "more competitively priced and technology advanced products and services," Parker said. She explained the wave of mergers among the largest oil companies has already raised competitive pressures for the "big three" service companies, Halliburton, Schlumberger, and Baker Hughes.

"We believe that the recent consolidation among upstream oil and gas companies will inevitably lead to further mergers and acquisitions in the oil field services sector as companies seek economies of scale and a broader array of technologies with which to compete," she said.

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