International E&P spending is expected to grow by 9% in 2010 and 12% in 2011, with the trend in positive growth continuing in coming years, according to an equity-research report by Barclays Capital.

Spurred by a bullish outlook on the long-term growth of the global upstream industry, the report’s authors, James Crandell and James West, have upgraded the oil service and drilling group to 1-Positive. Previously, the Barclays analysts had rated the sector at 2-Neutral.

Specifically, Barclays has revised upward leading oilfield services companies Halliburton Co., FMC Technologies Inc., and Pride International Inc. to 1-Overweight from 2-Equal Weight. It is also boosting Patterson-UTI Energy and ceramic-proppant supplier Carbo Ceramics Inc. to 2-Equal Weight from 3-Underweight.

“The sell-off in the oil service group due to the drop in oil prices, sovereign debt concerns and worries about softening GDP expectations, coupled with the fallout from the oil spill in the Gulf of Mexico, has created an attractive opportunity to step up investment exposure toward the oil service and drilling group,” the analysts report.

Large-cap oil services companies favored by Barclays also include Weatherford International, Cameron International, National Oilwell Varco and Schlumberger. Mid- to small-cap companies given a thumbs up include Oceaneering International, Tidewater, Core Laboratories, Dresser-Rand, Dril-Quip, GulfMark Offshore, Hornbeck Offshore, Chart Industries, Global Geophysical and ION Geophysical. Selected drilling contractors include Noble Corp., Seadrill, Transocean and Diamond Offshore.

North American land activity is also trending in positive territory and could potentially drive better-than-expected earnings reports for second-quarter 2010. According to the report, recovering North American land markets continue to improve during the near term, punctuated by an uptick in the onshore rig count. Moreover, oil-rich and liquids-rich shales, such as the Eagle Ford and Bakken, are bustling with E&P activity. “A large amount of production coming on this year is hedged,” Crandell and West report.

The analysts concede some bad news on the domestic front. “In North America, it is a short-cycle business, and we think that the second half of 2010 will likely represent a peak in terms of domestic rig activity. We are simply producing too much natural gas for the market.”

Crandell and West also note that, given the current gas pricing environment and the potential for the commodity’s value to trend lower in 2011, Barclays is deemphasizing its natural gas exposure, albeit not as emphatically as in previous reports.

The deepwater sector, however, is poised for long-term growth, despite recent uncertainty surrounding E&P activity in the Gulf of Mexico. Barclays expects Gulf of Mexico activity levels to remain below a previous peak, but does not see this pocket of activity dampening the robust global outlook for continued growth.

Citing deepwater-drilling successes by national oil companies as a main impetus for continued growth, Crandell and West say they “favor companies oriented internationally and still see deepwater as a plus.”

On the international front, E&P spending began to swing upward during the second quarter of 2010, the recovery of which is expected to accelerate during the second half of 2010 and in 2011 if oil continues to price between $70 and $75, the analysts note. According to the report, international E&P spending constitutes 75% of all E&P spending globally and is characterized by having a long cycle, evidenced by the eight-year upturn from 2000 to 2008.

Barclays estimates that this sector will see a 9% gain, based on 2010 international E&P spending of $335 billion by 151 companies. Championing the global E&P recovery are Russia, North Africa, parts of the Mideast, West Africa, Brazil and the Pacific Rim.

During the near term, Barclays is optimistic that solid second-quarter earnings from North American E&Ps, accelerating E&P spending abroad and news that the leaking well in the Gulf of Mexico has been capped, will push the values of the oil services and drilling group higher.

“These (upward trends) are occurring in an environment where investor sentiment is low and the stocks have underperformed,” Crandell and West say.

“If we are correct in that a new cycle internationally is beginning and that North American earnings will be better than expected as they go through a downcycle, this seems to us like a good time to add to positions in the stocks.”