Analysts: 2004 capital spending strong outside the US, Canada

April 5, 2004
A handful of analysts' forecasts indicates that there will be a moderate uptick in worldwide exploration and production capital expenditures this year. The forecasts peg worldwide upstream capital spending to increase 4-12% over last year's spending, with the majority of the projected growth outside the US and Canada.

A handful of analysts' forecasts indicates that there will be a moderate uptick in worldwide exploration and production capital expenditures this year. The forecasts peg worldwide upstream capital spending to increase 4-12% over last year's spending, with the majority of the projected growth outside the US and Canada.

Lehman Bros.' most recent semiannual E&P spending survey looked at the capital budgets of 335 companies based in North America and elsewhere. This survey found that there would be a 6% gain in expenditures outside the US, led by government-owned Latin American operators and European firms.

The survey also led Lehman to expect US E&P spending to be flat, with a decline in the majors' outlays offsetting increased spending by the US independents.

The survey showed that upstream spending in Canada also would be unchanged from last year.

With an average oil price of $25.29/bbl for West Texas Intermediate crude expected, Lehman said that 57% of companies in its survey would reduce this year's E&P budgets if the price averaged only $20/bbl, and the most frequently cited range for a reduction was 10-20%.

The average US natural gas price among the surveyed companies was $4.17/Mcf for Henry Hub gas. If the price averaged $3.50/Mcf this year, 59% of the firms would reduce their E&P budgets, most by 20-30%.

Lehman found a slight shift taking place toward more deepwater spending. The firm's report also revealed that the most important technologies influencing the E&P business are 3D and 4D seismic, fracturing and stimulation technology, horizontal drilling, and directional drilling, with fracturing and stimulation technology showing the biggest gain in utilization this year.

Prudential Equity Group Inc. expects upstream capital expenditures by oil and gas companies to swell 6-10% this year. Prudential expects that this level of spending will drive the 2004 average worldwide rig count up 8% to 2,355.

In the US, Prudential forecasts that the land rig count will grow 13% year-on-year, as average daily cash operating margins are up sharply from the first quarter of last year. The US offshore rig count and the Canadian land rig count, however, are expected to increase only 2% this year.

Outside the US and Canada, Prudential forecasts a 5% increase in land rig activity, driven by gains in Latin America and the Middle East and a slight rebound in Asia.

"We believe that the increase in international rig activity is partially a result of a shift in spending priorities by some of the large independent E&P companies from North America to what they see as more lucrative oil fields abroad," the Prudential report said.

Raymond James & Associates Inc. released one of the most bullish outlooks on 2004 capital expenditures. The firm estimates that worldwide E&P spending will rise 12% from last year's level.

Smith Barney's assessment of this year's capital outlays is one of the more conservative, projecting E&P spending will be up 4-6% from a year ago.

Like the other analysts, though, Smith Barney estimates that upstream spending outside the US will exceed that growth rate, rising 6.6%.