Many oil and gas exploration and production companies are planning 2003 capital expenditure budgets that are flat or lower than their 2002 budgets amid concerns about volatile commodity prices, Wall Street's expectations, and the economy in general.
"We are in a very strange period right now. Commodity prices are high, very goodU. Companies should be booming, and mergers and acquisitions should be at a high. Well, equities aren't booming, so companies are cautious," Rick Roberge, leader of the PricewaterhouseCoopers's oil and gas transaction services group in Houston told OGJ.
"A lot of companies don't even have plans in 2003 to spend their cash flow. They are going to spend less than their cash flow, meaning they are going to pay down some debt to make the balance sheet look better," Ro- berge said.
Executives from ConocoPhillips and Unocal Corp. confirmed Roberge's industry outlook.
Meanwhile, XTO Energy Inc. of Fort Worth announced a 2003 development and exploration budget of $400 million, up marginally from its $375 million budget for 2002.
ConocoPhillips
Speaking to a group of analysts in New York last year, ConocoPhillips CEO Jim Mulva said the company plans to reduce capital spending 25% compared with the stand-alone capital programs of the previous two companies.
Conoco Inc., Houston, and Phillips Petroleum Co., Bartlesville, Okla., completed their $15 billion merger into the third largest US-based integrated oil firm on Aug. 30, 2002 (OGJ, Sept. 9, 2002, p. 42).
ConocoPhillips plans to improve its return on capital employed to 12-14% during the next several years, he said. The strategy also calls for Conoco- Phillips to cut its debt-to-capital ratio to 34% by 2004 compared with a current ratio of 39%.
The goal is to reduce debt while bolstering equity. Mulva said the company's strategy also involves rationalizing up to $4 billion of lower-return assets and increasing the post-merger cost savings/ year target to $1.25 billion from $750 million.
"We will use a disciplined approach to improve returns for our shareholders," Mulva said. "In addition to the increased post-merger cost savings and asset rationalization, 75% of our 2003 capital budget will be dedicated to growing our upstream business, which has historically provided higher returns."
ConocoPhillips plans to hike the ratio of its upstream business to its total asset base to 65% from 57%. Its emphasis will be on "very large oil and gas developments that can generate significant revenues over long period at competitive operating costs," a news release said.
Regarding downstream operations, ConocoPhillips said it will focus on improved returns by providing reliable operations with a low-cost structure, rationalizing assets, executing clean fuels projects, and capitalizing on proprietary technologies.
Unocal
Unocal expects to keep its overall capital spending in 2003 about even with the 2002 level of $1.7 billion, its top executive told analysts.
"We see a ramp-up of spending on large, high-impact development projects while reducing spending on the smaller scale development and exploitation projects," Charles R. Williamson, Unocal chairman and CEO, said.
Unocal plans to maintain or reduce exploration capital spending, he added. Capital spending for large development projects, including the deep water in Indonesia and the Gulf of Mexico, along with the Caspian region development and pipeline work is expected to reach $700 million next year, up from $430 million.
Unocal will reduce other 2003 E&P development capital to $600 million, compared with $815 million in 2002.
The company has forecast exploration capital spending in 2003 at $300 million, down from an expected $370 million last year.
XTO
XTO plans to increase natural gas production during 2003 by 15% over 2002 levels, given its slightly higher budget for the year and its acquisition of coalbed methane gas producing properties in the San Juan basin from J.M. Huber Corp. for $153.8 million.
"Our disciplined and well-established development programs continue to provide top-tier performance—meaning consistent internal growth with healthy economic returns for the shareholders," said Chairman and CEO Bob R. Simpson.
The company plans to drill about 309 (255 net) wells and perform 385 (283 net) workovers and recompletions.
About 65% of the development budget will be spent in East Texas for 149 new wells and 60 workovers.
XTO plans to spend 20% of its development funds, evenly distributed, between the San Juan and Arkoma basins, to drill 114 new wells and perform 207 workovers while directing 10% of the budget toward Alaska, the Permian basin, and its Hugoton Royalty Trust properties.
Exploration activities are targeted to cost $20 million, a spokesman said.