Independent exploration and production companies have made some key gains during the first half of 1999, mostly due to rising crude oil and natural gas prices.
For a selected group of independent E&P firms analyzed by PaineWebber Inc., New York, the average projected equivalent daily production for second half 1999 is expected to be slightly off compared with the first half (see chart). PaineWebber anticipates, however, that capital spending for these firms will increase significantly-on average, 30%-as improvements are realized in discretionary cash flow.
Upside potential
In a recent report on the performance of independent E&P firms, PaineWebber said it sees definite gains in store for the group.
"Based on our current projections, we believe that our coverage group, on average, possesses at least 15% further upside during the second half of 1999," said the firm. "As confidence builds that the strength in crude oil prices will be sustained, and as the longer-term tightening (of the) supply-demand balance for natural gas becomes even more evident, we expect valuations for our coverage group to approach more, historical norms.
"In fact," continued PaineWebber, "strong momentum on the part of natural gas prices this winter could witness valuations for many companies surpassing the midpoint and approaching the upper end of their historical range."
It is PaineWebber's conviction that crude oil prices will hold up through at least the rest of 1999, with natural gas prices expected to "post new standards for an extended period" starting later this year and carrying into 2000.
PaineWebber concluded: "Although the direction of the overall market and commodity prices will influence E&P stock prices near-term, we believe that further upside lies ahead as current oil price levels gain credence and momentum builds for natural gas prices."
Spending plans
Declines in production are projected for certain firms during the second half. These are due to some substantial divestitures by such firms as EOG Resources Inc. (formerly Enron Oil & Gas Co., Ocean Energy Inc., Range Resources Corp., and Pioneer Natural Resources Co.).
For these companies, planned capital outlays reflect the reduced spending associated with property divestitures, says PaineWebber. For others, such as Louis Dreyfus Natural Gas Corp., Newfield Exploration Co., and Cross Timbers Oil Co., spending plans signal increases in property acquisitions and subsequent development work.
Despite an anticipated 30% increase in overall capital spending for the firms in the second half, an average production increase of only 4.2% is expected.
"A rough calculation-based on the average production decline rate for our coverage group, projected spending levels, and a 25% reduction in 1999 finding and development costs compared with last year-confirms this expected production increment," said the analyst.
PaineWebber noted that production for entire year is projected to decrease about 2% vs. 1998, while spending would be down about 30%.
"Of course, oil field service and drilling costs are also off by nearly 25% compared with last year. The corollary is that the high finding and development costs in 1998 reflect the near-historic high spending per unit of proven reserve additions-thus, the resulting lack of production growth this year."