Company News: Top US firms replace 98% of reserves during 1999

May 15, 2000
The 50 largest US oil and gas companies were able to sustain their reserve replacement levels in 1999 despite a 25% decline in capital spending, according to petroleum research analyst John S. Herold Inc.

The 50 largest US oil and gas companies were able to sustain their reserve replacement levels in 1999 despite a 25% decline in capital spending, according to petroleum research analyst John S. Herold Inc.

The analyst also notes that rising crude oil and natural gas prices, combined with lower operating costs, gave the largest US oil and gas companies a fivefold increase in net profits in 1999 vs. 1998.

Total capital spending for the 50 firms fell to $22.2 billion in 1999 from $29.7 billion in 1998. Exploration and development spending fell more steeply, declining by $8.9 billion to $15.6 billion. At the same time, expenditures by the top 50 US firms to acquire proven properties rose by $1.4 billion to $6.6 billion. Revenues were up 16% among the top 50 companies, while reserve replacement costs were down 42%.

Spending breakdown

John S. Herold Chairman Art Smith says the 36% decline in E&D spending reflects a prudent way to rein in spending during hard times by deferring more-speculative E&D projects. "Another conservative way to replace production is buying proved reserves, and our analysis showed that companies did substantially boost acquisition spending," said Smith.

More-prudent E&D strategies enabled the 50 companies to trim reserve replacement costs by 42% in 1999 to $5.13/boe, paced by finding and development costs that plunged nearly 60% to $5.18/boe, the best performance since 1995. Reserve replacement costs were 16% below the 3-year average, despite a 27% increase in acquisition costs to $5.01/boe.

The 50 companies replaced 98% of the oil and gas they produced in 1999, vs. 61% in 1998. The oil replacement rate rose from 54% in 1998 to 97% last year, while gas replacement inched up to 98% from 96%. The 50 companies have achieved a 105% replacement rate over the past 5 years, 94% through exploration and 11% through acquisitions.

Herold's analysis also found that the group's oil reserves at the end of last year were almost unchanged from yearend 1998, declining 0.2% to 18.1 billion bbl. Gas reserves ended 1999 up 0.7% at 94.1 tcf.

Production costs decline

Despite rising production taxes that resulted from higher oil and gas prices, overall production costs for the 50 firms dropped 4.6% to $3.53/boe, a 5-year low. The group's total oil and gas production declined 2.6%. But Herold Senior Vice-Pres. Nicholas D. Cacchione notes that the group's production revenues increased nearly 16% to $42.9 billion. Pretax income of the 50 increased ninefold to $13.7 billion, while net income was $9.7 billion, five times the 1998 total.

"These statistics indicate that, when oil executives keep their capital spending within cash flow and focus on their best projects, the industry can be profitable and create value for shareholders," Cacchione said.

During 2000, spending by the 50 companies will rise by more than 20%, Herold predicts, with sharp increases by independents offset by single-digit spending growth among majors.

Herold's annual study is based on a compilation of operating and financial data disclosed to the US Securities and Exchange Commission by the 50 companies with the largest US proved oil and gas reserves. The companies surveyed accounted for a little more than half of US proven reserves and production in 1999.