Salomon, Lehman, FBR: 2003 US E&P spending flat; RJA more optimistic

April 7, 2003
While US spending is flat, worldwide exploration and production expenditures will increase modestly this year, according to a handful of analysts conducting E&P spending surveys.

While US spending is flat, worldwide exploration and production expenditures will increase modestly this year, according to a handful of analysts conducting E&P spending surveys. Yet another firm's report pegged 2003 E&P spending growth at 20%.

Most believe that the recent, robust natural gas prices will decline after the North American heating season ends and head back toward the 5-year average. In Lehman Bros.' most recent semiannual E&P spending survey, company expenditure budgets were based on an average Henry Hub gas price expectation of $3.42/Mcf. Friedman, Billings, Ramsey & Co. Inc. (FBR) found an average expectation of $3.26/Mcf in its survey.

Gas price-driven spending

St. Petersburg, Fla.-based Raymond James & Associates Inc., however, anticipates substantially higher gas prices this year. This higher gas price, in turn, will generate higher E&P spending. Cash flows rather than budgets, the firm argues, drive actual E&P capital spending. Ergo, as oil and gas prices change, so will the budgets. The firm estimates that E&P spending in 2003 will be up by more than 20%.

Based on Raymond James' "conservative" 2003 gas price forecast of $5/Mcf, analyst Marshall Adkins wrote, "E&P companies should generate much larger amounts of free cash flow than the early budgets' forecast."

With this average gas price, the firm expects a 53% greater cash flow than with a $3.50/Mcf scenario.

While E&P companies typically spend their cash flow, Raymond James believes that it will be difficult for them to boost spending enough to exhaust their free cash flows this year. This is because the industry does not have the readily "drillable" prospects, rigs, and personnel to do so, said the Raymond James report.

Worldwide spending

The Lehman survey concluded that the 323 oil and gas companies polled planned a mere 4.2% increase in worldwide E&P expenditures this year, totaling $132.4 billion. The FBR survey of 190 companies resulted in an expected 4.8% increase in worldwide exploration and development spending.

FBR said that the expected increase is being driven by projects in Canada and other countries excluding the US, as national oil companies and US-based majors and independent producers are reallocating capital from the US to Canadian and other international ventures.

Entities such as Mexico's Petroleos Mexicanos, India's Oil & Natural Gas Corp., and Russia's OAO Gazprom and OAO Yukos are increasing budgets by as much as 10.1%, the firm reported.

Meanwhile, majors and independents alike are focusing on Southeast Asia, Africa, and the Middle East.

The strongest spending growth this year is expected to be in Canada. FBR's survey put Canadian expenditures up 8.9%, and Lehman's survey indicated a 7.2% jump in such outlays. Salomon's estimates called for a 5.7% increase in capital expenditures in Canada this year.

FBR said that the majors and large independents are attracted to the reserve potential in Canadian offshore and heavy oil projects and in Western Canadian conventional gas plays. Lehman also cited the fact that cash flows in Canada are generally greater due to the natural gas orientation of the area.

US lagging

US spending growth was forecast to be more subdued. Salomon Smith Barney saw an increase in capital outlays of only 0.1% for this year. FBR estimated that growth will be 0.2%, and Lehman saw a decline in US spending of 0.7%.

Jim Crandell, Lehman's oil services and drilling analyst, noted a host of factors driving the disappointing US outlook. These include the fact that the majors and larger independents continue to spend a greater percentage of their budgets internationally. Also, the independents are using conservative oil and gas price forecasts and see little upward change in cash flow.

Other factors Crandell cites are that independents are limited by their balance sheets, and the merchant gas companies all are forecasting lower spending. Also, he says that a lack of quality prospects appears to be playing a major role in limiting US spending.