The Oil Service Sector index fell 1.5 percent to 276.12 on the Philadelphia Stock Exchange. Noble Corp. posted the steepest decline, falling $2.58 or 5.1 percent, to $47.94. Light, sweet crude oil for October delivery fell 81 cents to $75.89 on the New York Mercantile Exchange.

Jefferies & Co. analyst Judson Bailey downgraded Noble, along with Ensco International Inc. and Rowan Companies Inc., to "Hold" from "Buy." The analyst cited concerns that the addition of new offshore rigs, called "jack-ups," could lead to oversupply and therefore lower prices.

International offshore rig prices or "dayrates" are "modestly below our expectations," Bailey wrote in a note Monday. The analyst expects further pricing deterioration through 2009 because of 40 uncontracted rigs that are set to be built over the next two years.

"Given the uncertainty over jack-up dayrates ... investors should focus on deepwater leveraged names," Bailey wrote, and suggested Diamond Offshore Drilling Inc. and Transocean Inc. as better investments.

Ensco shares fell $1.20, or 2.2 percent, to $53.99, while Rowan fell 63 cents to $35.91. Diamond shares fell $2 to $106.04 and Transocean shares fell $2.45, or 2.3 percent, to $106.07.

Bailey also lowered earnings estimates for all offshore drillers.

Meanwhile, a Bear Stearns analyst reiterated the firm's expectations that oilfield service consolidation will "increase in size and accelerate in frequency" in coming months, which may provide a boost for shares.

"M&A offers upside potential to many oilfield service and equipment stocks while strong fundamentals and low valuations temper their downside risk," wrote analyst Robin Shoemaker in a note Monday.

Shoemaker noted that deal values reached a 15-year high in the third quarter so far, at $23 billion. The $18 billion merger of GlobalSantaFe Corp. and Transocean announced in July, which accounted for most of that sum, is "an example of mega-deals to come rather than an anomaly," Shoemaker said.

GlobalSantaFe fell $1.99, or 2.7 percent, to $70.97.

UBS Investment Research initiated coverage of large-cap service providers Baker Hughes Inc., Halliburton Co. and Schlumberger Ltd. at "Buy" and Weatherford International Inc. at "Neutral."

Analyst J. David Anderson said production has become increasingly expensive because of shrinking reserves, pressure to maximize recovery rates and high commodity prices.

"Large cap service companies will be primary beneficiaries of this rising cost environment," Anderson wrote. However, he questioned whether there is "enough horsepower under the hood" at Weatherford to sustain its recent growth.

Baker Hughes fell $1.87, or 2.2 percent, to $83.44. Halliburton fell 58 cents to $34.67. Schlumberger fell $1.28 to $96.19. Weatherford fell $2, or 3.2 percent, to $59.95.