Salomon: '97 E&P looking strongest in 9 years

Based on companies' disclosed spending plans, 1997 is shaping up to be the strongest year-ahead outlook in 9 years, according to Salomon Bros. Inc.

Salomon Bros.' conclusion stems from its 15th annual survey of worldwide oil and gas exploration and production spending.

The survey, released last month, included 125 U.S. independents, 97 Canadian companies, 103 companies outside the U.S. and Canada, and 15 majors.

Significantly, when the 15% growth experienced in 1996 is combined with the 1997 outlook, it represents the strongest indicator of 2-year activity in the past 15 years, said Salomon Bros.

Double-digit spending growth is projected in all regions for 1997, the analyst said.

Salomon Bros. said a higher percentage of companies' E&P budgets are being allocated to offshore projects, driven in part by attractive prospects, 3D seismic technology, and increased operational efficiencies.

Heady outlook

"This year's survey...indicates that 1997 will bring a spending increase of 14.7% over 1996 expenditures-the strongest year-ahead outlook in 9 years," said Salomon Bros.

In addition, the Salomon Bros. survey indicates that spending for last year will represent a 15.2% increase from 1995 levels, significantly stronger than the 11.4% that was indicated in the midyear 1996 Salomon Bros. survey.

"Taken together, the 1996-97 spending plans represent the strongest outlook for oil service demand in the 15 years we have conducted the survey," Salomon Bros. noted.

Nearly half of all survey respondents said exploration and lease acquisition will account for a larger share of their 1997 E&P spending.

"This is the most significant shift toward new properties in 10 years and has positive implications for the oil service business mix," the analyst said.

Economics, company opinion

Economic perceptions for North American oil and gas exploration improved dramatically in the survey.

And a greater percentage of companies said they rate the economics of exploration outside North America as good or excellent.

Companies said they're basing their 1997 E&P spending plans on an average crude oil price of $19.67/bbl (WTI), up from $17.48/bbl a year ago, and an average natural gas price of about $2.03/Mcf (Henry hub).

Salomon Bros. noted that most U.S. operators do not believe gas markets are in balance; a sustained shift of more than 35¢/Mcf would cause operators to alter their spending plans, the analyst said.

Salomon Bros., contends the strong oil and gas prices that persisted in 1996 undoubtedly influenced near-term thinking. Several large spenders, said Salomon Bros., emphasized that their investment decisions are tested at far lower price scenarios.

On average, said Salomon Bros., companies would require a sustained oil price move of at least $3/bbl to change their spending plans by 10%.

Salomon Bros. noted that sensitivity to oil price changes, while still significant, "has declined materially from prior years."

Independent, major spending

Independents told Salomon Bros. they plan to boost 1997 spending by 18.3% to $10.9 billion, up from the $9.2 billion estimated for all of 1996.

Spending by this group jumped by 27.6% in 1996, well ahead of the 9.3% growth that was planned at this time last year and exceeding the 21.5% increase that was estimated at midyear 1996.

The majors with significant U.S. activity plan a 7.6% increase in U.S. E&P spending to $12.4 billion in 1997 from $11.5 billion in 1996.

Spending by this group increased an estimated 12.1% in 1996, exceeding the midyear forecast of 7.2%. Only Amoco Corp. and Unocal Corp. said they expect to reduce spending in the U.S.

In Canada, companies surveyed said they plan to increase 1997 spending 11.6% to $8.4 billion from an estimated $7.5 billion in 1996. Salomon Bros. said the 17.8% increase in spending now estimated for 1996 reflects a dramatic turnaround for the region.

Outside the U.S. and Canada, companies said they plan a 1997 increase in spending of 16.2% to $50.3 billion from $43.3 billion last year. Notably, Salomon Bros. said the 1997 increase forecast is the strongest in 5 years.

Gulf of Mexico's role

A common thread in disclosed spending plans is the growing importance of the Gulf of Mexico, most frequently mentioned as having the greatest exploration potential worldwide, Salomon Bros. said.

The Gulf of Mexico placed fourth in importance in the 1996 survey; significantly, it was never mentioned before in past surveys.

According to the survey, more than half the respondents said the Gulf of Mexico was a high potential area (54%), moving it ahead of Latin America (49%) and Asia/Pacific (39%).

Other regions mentioned more frequently were Africa, which was mentioned 29%-an increase of 10 percentage points.

Other findings

Companies' plans reflect how the industry is working smarter, more efficiently, and at less cost.

Salomon Bros. said, "For the fifth consecutive year, seismic technology ranks as the most important technology or trend in the industry," and its use continues to increase companies' efficiency.

A major concern for companies, however, is lack of supplies, equipment, and manpower. Said Salomon Bros., "Lack of supply continues to be a major concern for oil companies, with the majority of respondents mentioning lack of drilling rigs and a shortage of qualified personnel as critical issues."

The survey results indicate that companies overspent their original budgets in 1996. Compared with original plans disclosed 1 year ago, said Salomon Bros., 59% of respondents overspent their spending levels based on midyear indications.

"The 59% overspending rate is the highest we have ever recorded in our survey," said Salomon Bros.

More than half the Canadian operators overspent midyear forecasts, and about two-thirds exceeded plans of 1 year ago.