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More E&Ps Cut Spending to Prepare for Uncertain Times

Denver-based St. Mary Land & Exploration Co. in December reduced planned capital expenditures (capex) in 2009 by 54% compared with spending levels this year to keep "at or within" internally generated cash flow, the CEO said. Also announcing cutbacks in 2009 capex plans were three more onshore-focused producers: Delta Petroleum Corp., TXCO Resources Inc. and Compton Petroleum Corp.

Based on New York Mercantile Exchange pricing of roughly $42/bbl for oil and $5.30/Mcf for natural gas, St. Mary plans to invest around $350 million in exploration and development activities in 2009, down from $758 million forecasted for exploration and development activities in 2008.

"St. Mary's objective is to build net asset value per share, which necessitates a focus on maintaining high returns on capital employed," said CEO Tony Best. "Capital costs to drill and complete wells are coming down rapidly in response to the slowing of activity in the industry. In this environment, it makes sense to defer discretionary capital investment when possible to capture the additional value that can be generated on projects by executing them at significantly lower costs. St. Mary plans to drop six drilling rigs by the end of January 2009, at which time we will be running nine rigs to meet existing contractual or leasehold obligations."

St. Mary's program for next year "is designed to protect our balance sheet and to allow for a high degree of flexibility in drilling activity," said Best. "We have the ability to accelerate our operations if market conditions improve or defer further investment if conditions warrant."

In related news, St. Mary gained entry into the emerging Marcellus Shale in Pennsylvania's McKean and Potter counties through agreements that would allow it to earn about 43,000 net acres (50,000 gross), and it plans to test portions of the leasehold in the coming year. Details of the transactions were not disclosed. However, Best said one of its partners "has existing infrastructure and takeaway capacity that we believe will be a competitive advantage going forward."

Delta, also based in Denver, reduced 2009 capex plans to $85 million from a previously announced $150-175 million, and spending could be cut even more "depending upon fluctuations in oil and natural gas prices," officials said. About 70% of the revised budget is allocated to the Piceance Basin in Colorado; the remaining 30% will be devoted to completion activities in the Paradox and Columbia River basins "and the expectation of the drilling of one well in the Haynesville Shale." With operational control over its asset base and no significant drilling obligations, Delta said it is maintaining "the flexibility to further reduce the drilling budget on short notice, if necessary."

San Antonio-based TXCO already has slowed down some of its drilling activity in South Texas and is taking "proactive steps" to prepare for uncertain economic times, said CEO James E. Sigmon. TXCO, which explores for oil and gas in the Maverick Basin, onshore along the Gulf Coast and in the Midcontinent, plans to detail its 2009 capex budget later this month.

Because of the "unstable financial and commodity price environment we currently face, we have refocused our efforts and are taking proactive steps designed to improve the company's liquidity and financial strength going forward, including selective asset divestitures and holding active discussions with our lenders," said Sigmon. "We believe these are prudent steps to take, given the current economic environment." TXCO already has cut its operating staff by 20% in two of its subsidiaries: TXCO Drilling and Charro Energy, its heavy oil subsidiary. Additionally, two steam generators and five steam-injection wells have been shut in temporarily.

In addition, Calgary-based Compton slashed capex plans for 2009 and now intends to focus on resource plays in Niton in central Alberta and Hooker in southern Alberta. Activities will target higher productivity Rock Creek and Ellerslie formations in central Alberta and the Basal Quartz formation in southern Alberta. Belly River development in southern Alberta and exploratory activities in the Foothills will be delayed until commodity prices strengthen, Compton said.

"In light of current economic uncertainty, Compton has set a 2009 capital program to be financed from funds generated from operations utilizing a budgeted average natural gas price realization of C$6.82/gigajoule," Compton stated. "Based upon planned capital expenditures of C$161.5 million, we are targeting average 2009 production in the range of 25,000 boe/d to 26,000 boe/d, which approximates 2008 production levels, excluding production from those properties sold during the year. In addition to funds generated from operations, proceeds of approximately C$30 million could be realized from the planned monetization of certain midstream facilities." Compton said most of its exploration will be conducted over the last half of 2009.

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