In this issue’s feature on the best small-cap service-stock picks for 2008, analysts voiced a consensus view that the service companies best positioned for growth this year will be those that have a heavy weighting to the international and offshore markets, which are primarily oil-driven versus driven by natural gas—a commodity for which the outlook is more bearish.

Interestingly, Moody’s Investors Service, a leading New York-based credit-rating agency, has zeroed in on much the same theme.

While its 2008 credit outlook for oil service companies and drillers is generally stable, Moody’s expects continued divergence in the momentum of international or offshore markets and the North American markets that began in second-half 2007.

“We generally view those [debt] issuers that possess a significant international presence or deepwater Gulf of Mexico market presence as having more positive momentum in their businesses,” says Michael Doss, a Moody’s vice president and senior credit officer.

“One of the primary drivers for the strength in the international arena is that these markets are dominated by the major and national oil companies, which tend to be less commodity-price sensitive as well as having the financial wherewithal to support larger-scale projects even in periods of weaker commodity prices.”

Given the increasing challenges for upstream companies to replace production and grow reserves in the more traditional onshore markets, going farther offshore has become increasingly important to the larger oil and gas companies and currently has the best visibility in terms of producers’ activity, says Kenneth Austin, a Moody’s vice president and senior analyst.

“In addition, the international markets are largely oil-weighted projects, which have a more supportive price outlook.”

This perception is shared not only by many in the capital-markets arena, but also in the private-equity realm. Greenwich, Connecticut-based First Reserve Corp. recently announced it is continuing its long tradition of investing in the global oilfield-services market with the planned acquisition of U.K.-based Abbott Group Plc.

“The deal, which values Abbott’s existing issued-share capital at US$1.8 billion, will be the largest private-equity buyout ever accomplished in the drilling-services industry and the first and largest European oilfield-services take-private,” says Will Honeybourne, a First Reserve managing director.

Moody’s Austin views those service companies that are focused or largely dependent on North American markets as having less favorable conditions compared with that of the past two years. “These companies will likely see [2008] earnings and cash flow at levels below 2007, though still very good by historical standards.”

Why? “We expect a deceleration in the North American markets as a number of domestic producers slow their capital spending in 2008, either due to a weaker gas-price outlook or because the equity markets will no longer support the recent E&P company trend of outspending cash flows and increasing leverage to achieve production growth,” the analyst says.

Some producers have already discussed a more flexible spending program in 2008 that could adjust to gas-price changes. “Many producers are focused on high gas-storage levels and the risk of a warm winter, which could depress natural gas prices,” observes Steven Wood, a Moody’s vice president and senior credit officer. “If this transpires, it would have a direct effect on the economic viability of some of the unconventional resource plays in North America and adversely affect many service companies.”

Another potential negative factor for the service sector, he says, is the significant capacity expansion that has taken place —including land drilling rigs, pressure pumping and workover rigs—and begun to weaken utilization and pricing.

“Furthermore, the North American [oil-services] market has been impacted by the continued weakness in the Canadian market due to weaker natural gas prices, rising costs for producers, as well as the uncertainty created by changes in the Alberta royalty program,” says Doss. “This has resulted in the migration of [services] equipment from Canada, bringing more supply to U.S. basins.”

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