By OGJ editors
HOUSTON, Dec. 9 -- Various forecasts for oil and natural gas companies' capital spending budgets now being released will likely prove to be "far too pessimistic," according to Raymond James & Associates Inc. analyst Wayne Andrews.
In a research note released Monday, Andrews estimated that exploration and development spending for 2004 would post close to 41% higher than a year earlier for the 29 companies in the analyst's universe of coverage. Andrews said that initial predictions for weaker E&P capital budgets for 2003 were up 23% over 2002. By midyear 2003, Andrews noted, RJA's group of companies were up another 10%.
"So much for the yearend budget surveys," Andrews said.
"Over the next few weeks, capex surveys will likely predict that 2004 spending will be flat or even lower (OGJ Online, Dec. 8, 2003)," Andrews said.
Reasoning
Andrews cites several reasons for the miscalculation. "One reason the surveys tend to be wrong is that most E&P companies have not yet set their 2004 budgets, so these surveys will only reflect a vague 'guess' on their part.
"Secondly, initial budgets by E&P companies are nearly always predicated upon very conservative commodity price assumptions," he added.
Specifically, Andrews said that most E&P firms are basing their spending plans upon $4.50/Mcf or lower natural gas prices, "while we believe gas prices will average closer to $5.50[/Mcf] in 2004."
Andrews concluded, "For these reasons, our beliefs run counter to the myth that next year's capex spending will be weak. As our capex analysis. . .shows, we expect the US E&P business to post exploration and development spending increases of an additional 10-15% in 2004."
RJA based its conclusion on several key assumptions, Andrews said. These include:
-- Current industry fundamentals will be sustained.
-- The total spent by RJA's coverage universe on acquisitions will be lower than the $4.3 billion spent in 2003.
-- Debt reduction and stock buyback by RJA's group of companies will increase only slightly next year.
