Lower E&P spending ends 6-year global rally

Sam Fletcher
Senior Writer

HOUSTON, Dec. 20 -- Global spending for exploration and production is expected to decline 12% to $400 billion in 2009—"a reversal after 6 years of global growth," said analysts at Barclays Capital Resources, New York.

Based on a semiannual survey of 357 oil and gas companies, Barclays Capital analysts said, "Budgets are being cut in response to the significant decline in commodity prices, constrained cash flow, and the tight credit markets." The surveyed companies based their 2009 budgets on average prices of $58/bbl for oil and $6.35/Mcf for gas. The most frequently cited prices that would trigger budget cuts were $50/bbl for West Texas Intermediate and $5/Mcf for natural gas on the Henry Hub, La., spot market.

"However, given the recent fall in prices, these price assumptions may prove to be overstated," analysts said. Among the surveyed companies, 74% said their E&P
spending will be equal to or less than their total cash flow in 2009. Only 26% of the operators expect 2009 spending to exceed cash flow, compared with 43% in the prior year.

Barclays Capital analysts reported, "The sharpest decline in spending is expected to be in the US, where 2009 E&P expenditures are indicated to drop 26% to $79 billion," ending a 4-year upturn. They expect Canadian budgets to fall 23% to $22 billion in 2009, with reductions to be broad-based across all company budget sizes. Canadian capital spending has lagged behind the US and internationally over the last 2 years. However, analysts look for North American E&P spending to pick up in 2010.

"North American independents are highly sensitive to natural gas prices and cash flow, and adjust budgets quickly as industry conditions warrant. Many independent E&P firms were also outspending cash flow using debt, and credit market issues will likely limit this activity in 2009," analysts said.

Although gas prices remain the leading driver of 2009 E&P budget decisions, 49% of respondents listed oil prices among key determinants, an increase of 10%. Cash flow also ranked highly among respondents (at 48%), while the importance of prospect availability of those surveyed fell dramatically—to 23% from 45% last year.

"While the largest companies typically respond less quickly to changing industry conditions, given the severe nature of this correction, companies of all sizes are reacting with significant budget reductions," the financial firm reported. Of the 245 surveyed companies operating in the US, 62% plan to cut spending more than 10% in 2009. Just 13% plan to increase spending by 10% or more, while 25% anticipate spending to be flat.

Escalating oil and gas prices through mid-2008 funded a 22% increase in global E&P capital expenditures this year, up from projected increases of 20% in Barclays Capital's 2008 midyear survey and 11% at the start of this year.

Although 53% of those surveyed said US drilling economics look good for 2009 (up from 49% in the prior year), 8% of operators said domestic drilling economics are poor (up from 4% the prior year). Internationally, the percentage of operators who said drilling economics were either "good" or "excellent" for the coming year declined to 55% from 65% in 2008.

Most of the surveyed producers said well stimulation, including hydraulic fracturing, is the most important technology, overtaking 3D and 4D seismic, which slipped to No. 3. Horizontal drilling was No. 2. Also frequently mentioned were directional drilling, reservoir recovery optimization, and drill bit technology.

Company budgets
The larger companies estimated by Barclays Capital to have the greatest US budget cuts in 2009 include Chesapeake Energy (down 51%), Devon Energy (down 44%), EOG Resources (down 34%), Sandridge Energy (down 78%), Hess Corp. (down 62%), Anadarko Petroleum (down 32%), and ConocoPhillips (down 23%)—"all of which have budget cuts of at least $1 billion. No companies are making sizable additions to
their budgets," analysts said. However, they look for North American E&P spending to pick up in 2010.

The larger companies with the greatest budget cuts in Canada are Husky Energy (down 47%), Devon Energy (down 71%), Talisman Energy (down 47%), EnCana (down 16%), Canadian Natural Resources (down 23%), ConocoPhillips (down 14%), Penn West Petroleum (down 20%), EOG Resources (down 50%), Nexen (down 47%), Royal Dutch/Shell (down 7%), Imperial Oil (down 13%), Murphy Oil (down 25%), Crew Energy (down 56%), and Apache (down 13%).

"Given the longer-term nature of international projects and the dominance of the majors and national oil companies, E&P capex budgets outside North America are showing more moderate declines—down 6% in 2009 to $300 billion …by the 100 companies in our survey. This would end a 9-year upturn," analysts said.

Budget trends are mixed internationally, with several companies expected to increase E&P spending in 2009. "The super majors have flattened their international E&P spending, with the big six estimated in the aggregate to have a decline of 2%. We
forecast that BP is reducing spending by 4%, with Royal Dutch Shell and Total also anticipated cutting expenditures by 6% and 5%, respectively, while Chevron is estimated to maintain its 2008 budget into 2009. We believe that ConocoPhillips and ExxonMobil will likely boost expenditures by 5% and 3%, respectively," said Barclays Capital analysts.

"Independents based in North America invest the bulk of their capital in their home countries, but in recent years, these companies have shifted funds from domestic to international operations," analysts noted. "These companies are showing mixed plans for international investments in 2009, with some companies showing growth, but others are showing big cuts in expenditures leading to an overall 22% decline in spending."

Russian companies are making some of the biggest budget reductions after leading spending growth for several years. "Specifically, Lukoil is expected to reduce its 2009 capex by 50%, and Surgutneftegaz, Gazprom Neft, Rosneft, and TNK by 20–26%. Only Gazprom is expected to spend more in 2009 compared to 2008—up a modest 2%," the analysts reported. "We believe that pressure on cash flows, financial market issues, and disappointment over tax reform are all leading to the turnaround in Russia."

Among the largest companies in Latin America, Barclays Capital estimates Petroleum Co. of Trinidad and Tobago Ltd. (Petrotrin) will increase its budget 27% and Petroleos Mexicanos (Pemex) to be up "a modest 5% as spending in the Chicontepec and Cantarell areas is partially offset by a slowdown in Burgos and southern Mexico." Budget declines are forecast for Pan American Energy (down 5%), Petroleos de Venezuela SA (PDVSA) (down 15%), and Petroleo Brasileiro SA (Petrobras) (down 6%). "Latin America on balance is forecast to be modestly lower," analysts said.

Average spending by nine surveyed companies in the Middle East-Africa region is expected to decline 2% in 2009. Company projections include Abu Dhabi National Oil Co. (up 22%), Kuwait Oil Co. (up 15%), National Oil Corp. (up 20%), Sonangol (up 3%), and Sonatrach (up 10%), offset by declines at Saudi Aramco (down 15%), Nigerian National Petroleum Corp. (down 13%), and Petroleum Development Oman (down 5%).

"European-based companies are taking a deep slice out of their 2009 E&P expenditures, with the top six companies in aggregate showing declines of 11%. All of these companies are showing declines, except for a flat budget for BG Group," analysts reported.

"Trends for state-owned and international oil companies based in Asia are also mixed. Companies such as CNOOC (down 13%), Pertamina (down 11%), PTT E&P (down 16%), and Reliance Industries (down 15%) are showing budget cuts, while others are forecasting gains—Inpex (up 13%), ONGC (up 7%), and Petronas (up 10%)."

Contact Sam Fletcher at samf@ogjonline.com

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