U.S. oilfield service and drilling companies are generally expected to report sharply higher first-quarter earnings in the coming weeks, reflecting a continuing recovery in oil and gas companies' exploration and production spending in response to strong energy prices.

However, recent stock price performance within the sector has been affected by broader stock market weakness and fears that an economic slowdown could ultimately hurt demand for oil and gas.

Bill Herbert, an analyst with Houston-based Simmons & Co, said he expects first-quarter oilfield service and drilling earnings to meet or beat analysts' consensus estimates. He remains "cautiously optimistic" about the longer term outlook for the sector but acknowledges that many investors harbor some apprehension about what the future may hold.

"I still think there are lingering concerns about the depth and longevity of the current economic malaise and what its impact will be on demand for oil and gas," he said.

Larry Tedeschi, an energy analyst with One Group Mutual Funds in Columbus, Ohio, said his company had pared back some of its oil and gas exploration and production (E&P) holdings after U.S. oil and gas price prices retreated from highs of around $37 per barrel and $10 per thousand cubic feet late last year.

"We've likely seen the best quarter for the E&P stocks ... but for the oilfield service companies it will be quite a while before they hit their peak earnings, so we've stuck with them to a greater extent," he said.

One Group's biggest holdings in the sector include service firms Weatherford International Inc. and BJ Services Co. and drillers Noble Drilling Corp. and Transocean Sedco Forex Inc.
Tedeschi said he was mindful that oilfield service and drilling stocks were a volatile subsector of the energy group, soaring higher when oil and gas prices are on the rise but falling just as precipitously when prices turn lower, and said he was thinking ahead to when he might have to trim holdings.

"We're already looking for the point where we will start pulling back on oilfield services," he said. After setting a high of 141.25 in November 1997, the OSX oilfield services index .OSX> sank to a low of 45.53 in October 1998, mirroring a sharp drop in oil prices over the same period.

The index rallied strongly in 1999 and 2000, reflecting the recovery in oil and natural gas prices. It set a new high of 143.98 last September, but subsequently lost some ground later that year and in early 2001.

So far this year the OSX index is showing a loss of about seven per cent from end-2000 levels, a better performance than the Standard & Poor's 500 index, which is off 14 per cent.
In a recent research report Salomon Smith Barney analyst Geoff Kieburtz said investors appeared to be overlooking solid fundamentals for the oilfield service and drilling sector by dwelling on concerns about an economic downturn and recent downward movements in oil and gas prices.

"We believe the focus on the marginal changes in oil and gas prices obscures the very favorable E&P investment environment created by the absolute pricing levels," he wrote. While lower than their peaks of late 2000, current benchmark U.S. oil and gas prices of around $27 per barrel and $5.50 per thousand cubic feet remain high by historical standards.

Many analysts believe this price strength will support an enduring recovery for oilfield service providers and drillers. "We believe that this cycle has a reasonably good chance of being long in duration, simply because we are very much constrained from a supply standpoint, both on oil and natural gas and the only solution to that is continuing increases in drilling activity," said Herbert of Simmons & Co.

Within the sector, Herbert favours services firm Cooper Cameron Inc and drillers with exposure to deepwater markets or markets outside North America where recovery is only just starting to unfold.