Oilfield-service providers are riding a wave of record capital spending in the upstream sector, increased sharply over the past five years, according to Jeff Morrison, associate director for Standard & Poor's Rating Services.

"The industry spent over $400 billion last year, including acquisitions in the upstream. Trends on exploration and development spending are increasing as well," Morrison said recently at Standard & Poor's energy conference in Houston. This compares with approximately $150 billion spent in 2002.

As such, international rig counts stand at more than 1,000, a steady climb of 10% since 2000. And in spite of softening gas prices, the U.S. rig count remains strong at about 1,800, although it has flattened some in the past few quarters.

This is likely a result of new-build rigs coming onto the market and displacing older equipment, Morrison said. "As a result, we've seen a pretty reasonable drop in dayrate prices for land rigs, which were through the roof last year. We've seen about a 5% to 14% drop across various basins."

Another positive trend for service providers is increasing activity in horizontal and directional drilling.

"That tends to be one product area where larger companies providing these services are doing very well. There continues to be an increase in focus on gas-resource plays in the U.S. that tend to be more service intensive, given that they use a lot of horizontal drilling and stimulation services."

The Canadian market, though, stands out as a blemish in the service sector. "We've seen rig counts fall off significantly in this area." Canadian rig counts peaked in early 2006 at near 700, then fell as low as 100 this summer before picking up somewhat.

Weak gas prices and a run-up of service costs resulted in several large companies pulling equipment out of the market for areas that promise better returns. "This area will continue to remain a drag on near-term performance for some companies with significant exposure there."

On the plus side: The offshore-drilling sector continues to see a record backlog. "The majority of companies have significant contract backlog over the next two to three years, particularly companies with good exposure in the deeper-water asset classes."

S&P has a more favorable view of these, given some weakness in the jack-up market in the Gulf of Mexico, where dayrates and asset utilization have declined significantly as more equipment has moved to more lucrative international markets.

The long-term trend remains favorable, he said. Factors include growing demand by national oil companies, which account for 70% of the world's reserves. Maturing reserves drive service demand as upstream producers try to maximize recovery from existing reservoirs. Also, demand for service-intensive technology, such as directional drilling, subsea development, stimulation and intelligent completions, is on the rise.

How long can the upbeat cycle last? The forecast is nine months to a year, said Morrison. While a shift in gas prices could create a few soft months, the thin supply-and-demand balance for oil suggests a continued need to spend in the upstream. "In the longer term, the trends continue to be favorable in this sector."