Salomon Bros. lists gain in E&P budgets for 1996

Salomon Bros. Inc.'s annual survey of the petroleum industry's spending plans shows a 7.7% gain in outlays for worldwide exploration and production (E&P) projects this year.

Conducted last month, the survey of 1996 E&P budgets pegs this year's outlays at $63.9 billion. It is the largest planned increase in the New York investment firm's annual yearend tally since December 1990.

Industry's plans call for U.S. spending to increase a robust 11.8% to $18.2 billion after an advance of only 4.7% in 1995. Notably, Salomon Bros. said, major operators will take the lead in 1996 with a planned 13.4% increase compared with a 9.3% advance planned by independents.

In Canada, operators will trim E&P outlays 6.4%, slightly greater than the 4.4% cut registered in 1995.

A rebound in spending outside North America that began last year will continue, but at a more modest pace-8.6% vs. 14.4% in 1995. "We believe project deferrals from 1994 were a significant contributing factor to the strong 1995 growth in international spending," Salomon Bros. said.

In addition to its annual yearend survey, the firm updates its data each midyear. The last midyear tally showed industry had adjusted its world E&P spending plans to a little less than $59 billion for 1995 (OGJ, July 31, 1995, p. 97).

U.S. budgets

A breakout of Salomon Bros.' December 1995 survey, its 14th, shows independents plan to spend $8.3 billion, up from the $7.6 billion expected in 1995. Spending by this group advanced 4.1% in 1995, somewhat less than anticipated.

A combination of a firmer outlook for natural gas prices, drilling successes, and improved efficiency appears to be lifting spending plans for 1996, the firm said. Deferral of projects during a period of weak gas prices in 1995 also appears to be playing a part in the boost in spending.

Among companies planning significant increases are Oryx, Apache, Coastal, Anadarko, Chesapeake, Cabot, and National Fuel Gas. Significant spending reductions are in store for Kerr-McGee, KCS Energy, Burlington Resources, and BHP.

The 15 major oil companies with significant U.S. activity plan a jump to $10.3 billion in 1996 from $9.1 billion in 1995.

"The majors' enthusiasm for the U.S. began to show in late 1995 as spending growth for this year of 5.1% exceeded expectations," Salomon Bros. said.

Shell has the largest increase by far for 1996. It plans to hike spending by $600 million with particular emphasis on deepwater prospects. The company is experiencing "dramatic efficiency gains" through new technology on such projects.

Other majors planning significant increases in the U.S. are Phillips, Amoco, ARCO, British Petroleum, Texaco, and Chevron. Material spending reductions are planned by Dupont/ Conoco, Pennzoil, and Unocal.

Of the total planned increase of $1.9 billion in the U.S. this year, majors account for $1.2 billion. It's the strongest planned increase in U.S. spending by majors since the surveys began.

Canada

1996 will be the second consecutive year of reduced spending in Canada (1995 was down 4.4%) following robust activity in 1994.

Concern about natural gas transmission capacity and availability of financing are the main reasons for the lower spending levels, Salomon Bros. said.

Sizable decreases in spending are planned by Pan Canadian, Anderson, Poco, Conwest, Amoco, Norcen, Morrison, Gulf Canada, Sceptre, and Tarragon.

Spending increases are in store for Alberta Energy (more than offsetting the Conwest decline), Renaissance, Apache, and Shell Canada.

Outside North America

Outside the U.S. and Canada, the 8.6% increase indicated for 1996 exceeds the 7.5% growth originally indicated for 1995 in Salomon Bros.' December 1994 survey. It is the strongest year ahead outlook in 4 years.

Companies with major increases in international spending are British Petroleum, ARCO, Texaco, Amoco, Unocal, Mobil, Exxon, Enterprise, Petrofina, Total, and Dupont/Conoco.

However, significant cuts are planned by YPF, Phillips, British Gas, and Monument.

Price outlook

Companies base their 1996 E&P spending plans on an average crude oil price of $17.48/bbl for West Texas intermediate for the year, essentially flat with the $17.55 outlook in December 1994.

The average natural gas price expectation at Henry hub is $1.75/Mcf for 1996, down from the $1.95 figure used for 1995 planning.

Salomon Bros. used its survey to gauge operators' spending response to changes in oil and gas prices.

If WTI prices averaged $21/bbl in 1996, 57% of all companies in the survey would increase their E&P spending. But if WTI prices averaged only $15, 51% would trim E&P spending.

If natural gas prices averaged $2.10/Mcf, 56% of the companies would increase E&P outlays. If averaged only $1.50/Mcf, a "surprisingly low" 38% of respondents would cut spending.

Thus, oil and gas prices remain the most important factor in determining E&P spending plans, followed closely by availability of good drilling prospects and cash flow, Salomon Bros. said.

Confidence in the U.S. natural gas market remained mixed at the time of the survey.

Only 32% of the companies believe natural gas markets are in balance year round. This is an increase from 27% a year ago. But 49% believe the market is not in balance at any time of year vs. 43% last year.

Other findings

Among other points, Salomon Bros. found that almost half (49%) of all companies' E&P outlays in 1995 exceeded operating cash flow, up from 39% that originally had planned to operate in that manner.

In 1996, slightly more companies (38%) plan to overspend cash flow than plan to spend less than cash flow (32%).

Although 1995 spending will significantly exceed original plans, a greater number of respondents (37%) underspent original plans than overspent (30%). Salomon Bros. said, "This suggests those that increased spending were larger companies, and the increments were substantial."

Nearly two thirds of the U.S. majors expect E&P to claim a larger share of total capital spending in 1996 than in 1995. It is the largest shift toward E&P spending in the history of the survey.

E&P plans for 1996 show a steady shift in emphasis toward oil drilling. About twice as many respondents plan to increase emphasis on oil as plan an increase in natural gas drilling.

An expected increase in exploration drilling for 1995 was much more modest than originally anticipated. Plans for 1996 show about one third more companies increasing exploration drilling (32%) than increasing development drilling (24%).

The trend toward increased offshore spending continued in 1995. More of the same is in store for 1996. About three times as many companies (30%) plan to increase offshore spending as plan to increase onshore spending (9%).

Seismic was again the most often cited technological development having a significant effect on E&P. More than twice as many companies (43%) will direct more E&P spending toward seismic surveys in 1996 than will direct less (21%). However, this is the largest number of companies planning a decrease in the past 4 years.

Lease purchases represented a smaller fraction of E&P spending at more companies (29%) than expected (19%) in 1995. For 1996, lease acquisitions will remain about constant as a percent of E&P spending.

Pipelines and production facilities will represent an increased portion of E&P spending, for twice as many U.S. independents and international operators plan an increase as plan a decrease. Overall, 40% of companies expect an increase compared with 23% projecting a decrease.

The percentage of companies that view the economics of drilling to be superior to purchasing reserves remained high at 72% but fell from the record 81% a year ago.

Despite the preference for drilling, a record number of companies (72%) are seeking to buy reserves.

Latin America displaced Asia/Pacific as the region with the greatest exploration potential. More than 60% of respondents cited Latin America compared with 53% for Asia/Pacific and 30% for the Gulf of Mexico.

Overall, 25% of all companies believe they experienced lower drilling costs in 1995 vs. 33% experiencing higher costs. For 1996, only 15% expect lower drilling costs while 26% look for those costs to rise.

The survey

Salomon Bros. made these points about its surveys.

Its list of companies varies slightly from year to year, particularly for U.S. independents. So it is not statistically accurate to compare total estimates for spending with estimates for prior years.

When possible, reported budgets exclude large purchases of reserves or other companies. When company acquisitions have occurred, Salomon Bros. attempts to include the spending of the acquired company for both years.