Salomon: E&P spending outlook still bullish

Bill Brocato
Staff Writer

Although oil prices have recently tanked alongside a bearish outlook on Asia's recovering economy, oil industry analysts at Salomon Smith Barney remain fairly bullish about 1998's outlook for upstream spending.

In the brokerage firm's annual survey of 1998 worldwide oil and gas exploration and production expenditures, unveiled in January, it predicted that outlays would increase 10.9% in 1998-the third consecutive year of double-digit growth.

Its analysis also shows that E&P spending in 1998 will register the second strongest growth its survey has forecast in a decade.

"In this survey," the analysts wrote, "202 oil and gas companies plan worldwide E&P expenditures in 1998 of $93.8 billion, up 10.9% from $84.6 billion estimated for 1997."

But that was before the price of West Texas intermediate fell below $15/bbl.

No panic yet

"We have since called 15 of the largest oil and gas companies in our survey," said Salomon analyst Mark Urness. "They indicated to us that their expenditure plans hadn't changed. But they did say if prices stay below $16 for several months, they would have to develop contingency plans for better cash-flow management."

Urness and his colleagues believe most major oil companies cannot simply place their E&P activity on hold. The demands of deepwater exploration in the Gulf of Mexico and abroad leave companies little room to shelve long-term plans. "We believe E&P expenditures will show 6-7% growth over 1997 if (oil) prices remain low through the third quarter," he said.

Urness pointed out that natural gas prices are another mitigating factor companies must consider in the coming months. He said that companies that are highly leveraged in oil production, such as Pioneer Natural Resources Co., are trimming back their E&P budgets. He noted that Pioneer's 1998 E&P budget, set at $600 million, has since been trimmed to $500 million.

Urness contends, however, that oil prices are not expected to remain low through the third quarter and that the Organization of Petroleum Exporting Countries is expected to take some measures at its June meeting to help bolster prices.

U.S., Canada spending

Returning to the survey, Salomon believes the U.S. and Canada's 2-year strong surge in E&P activity will moderate while activity outside these two countries will continue to expand.

Spending in the U.S. is set to increase only 6.1% in 1998 compared with a 20.7% increase in 1997. In Canada, a 6.7% increase is anticipated, following an increase of 29.3% in 1997. That rate of growth does not fully reflect the continued expansion of activity in the deepwater Gulf of Mexico, where some companies plan spending increases of as much as 20%.

"The implication we draw from the data is that spending increases are greatest where the development of new technology is viewed as having the most impact on the economics of finding and developing new reserves," the analysts say.

In the U.S., the 124 independents surveyed plan a 8.4% increase in expenditures to $14.7 billion, up from $13.5 billion in 1997. Spending actually grew 25.1% in 1997, well in excess of the 18.3% growth planned at this time last year, but consistent with the 23.7% increase estimated in Salomon's midyear survey.

"Accelerated drilling cycles, new prospects (sometimes recently acquired), and better drilling success than expected were the most common reasons given for exceeding original 1997 plans," the analysts wrote.

Similar explanations were also given for planned 1998 increases, with a particular emphasis on the deepwater Gulf of Mexico. Among the companies planning significant increases are Union Pacific Resources Inc., Oryx Energy Co., Noble Affiliates Inc., Burlington Resources inc., Louis Dreyfus Natural Gas Partners, and Equitable Resources Inc.

Other spending

The 14.4% increase slated outside the U.S. and Canada in 1998 is consistent with the 15.6% growth in 1997.

Outside the U.S. and Canada, 97 companies plan spending to increase by 14.4% to $54.8 billion from $47.9 billion in 1997. Frontier territories are targeted for significant increases in spending in 1998, including deepwater West Africa and the former Soviet Union. Carryover of projects that were not implemented in 1997 was also mentioned frequently as an explanation for 1998 spending growth, they said.

Salomon's survey did, at least for the moment, dispel some fears that the Asian economic crisis would hurt E&P activity. About 90% of the companies reported that Asia's economic flu "had no impact on their E&P plans."

Another key finding that Salomon noted was companies' willingness to base their E&P budgets on a longer-term perspective instead of on near-term conditions. "An unusually large number of respondents (50%) plan on spending more than cash flow in 1998," it said. "This certainly demonstrates a multi-year outlook."