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Big Oil Spending to Eclipse Independents

North American exploration and production spending in 2013 will be dominated by Big Oil, international oil companies (IOC) and national oil companies (NOC), according to an annual spending review by Barclays Capital.

U.S. independents blew through most of their 2012 capital expenditure (capex) plans by the end of September, and they are likely to moderate spending in 2013, analyst James West said during a conference call last week. However, that likely won't be the case for the super majors and foreign producers.

The major U.S., European and Asian IOCs and NOCs "are helping drive growth in the U.S. market and are increasing spending as a percentage of total U.S. upstream capex as a result," he said. "We estimate these global majors will constitute roughly 32% of total U.S. spending in 2013, including offshore, up from 27% in 2007."

Based on Barclays recent survey of more than 300 global producers, U.S. capital spending should be up 0.7% year/year to an estimated $139.634 billion from $138.718 billion. Canadian capex is set to increase around 0.6% to $44.696 billion. Operators in North America are basing 2013 capital budgets on an average oil price of $85/bbl West Texas Intermediate (WTI) and an average natural gas price of $3.47/Mcf Henry Hub. These budgeted levels compare to current prices of around $89 WTI and $3.44 Henry Hub.

"I think the super majors, the NOCs already have acquired the acreage they are going to spend on and we should see a steady increase in overall capital spending," said West. "It shouldn't take too long to be evident in the market...There may be a decline in the first half of next year through the seasonal period for the rig count in the Bakken and the Rockies. Beginning in March, the rig count should start to move up, led by the super majors and NOCs, and it will be evident then."

The share of U.S. spending by the global majors "only represents 500 basis points of incremental market spend," but "we think this is likely conservative due to the recent stalling in Gulf of Mexico [GOM] investment programs as a result of the [deepwater drilling] moratorium in 2010. Further, we note that in aggregate total global major spending in the U.S. is expected to be up 86% in 2013 from 2007 levels, versus total U.S. E&P spending growth of roughly 56% over the same period."

While the largest integrated companies continue to invest around the world, North American independents are heading home. "Spending by the North American independents internationally is expected to drop in 2013, down 5% from 2012, as the majority of companies appear to be shifting exploration and production expenditures to the U.S. given the ongoing oil renaissance, the potential early days of a gas cycle and an improving outlook in the Gulf of Mexico."

Some independents won't shy away from opening their pocketbooks, however. For instance, Apache Corp. has an "active" GOM program planned, and onshore heavyweight Encana Corp. plans to up its spending with the help of some joint venture (JV) partners. Relative newcomer to the onshore Halcon Resources also plans to increase capex. JV activity with NOCs and higher spending by international independents also should contribute to U.S. capex gains in 2013 -- primarily by China's CNOOC, Australia's BHP Billiton, and Norway's Statoil ASA.

To get an idea of how important Big Oil spending is to North America, consider U.S.-based majors ExxonMobil Corp. and Chevron Corp., which together represent about 12% of U.S. and Canadian spending, said West. The two producers haven't locked in their capex plans, but already they "plan to spend an additional $1 billion between them in 2013."

North American capex had jumped 27% in 2010 from 2009 and rose 31% in 2011, but it was only 4% higher this year. The constrained spending, said West, this year resulted from lower natural gas and natural gas liquids prices, as well as "modestly" lower WTI oil prices; volatile differentials in Canadian basins; logistical challenges in many of the newer oil plays; and a desire by producers to spend within cash flow.

Several large North American service companies had indicated that producers already had overspent this year's budgets and were planning to curtail spending in 4Q2012, West said. So his team examined the budget run-rate for a sample of the large domestic independent operators to gauge the spending levels through December. Based on their sample, they estimated that the independents already had spent 80-85% of their planned 2012 budgets.

Barclays survey, which got underway in early November and concluded Nov. 30, tends to be "accurate directionally," even though the budgeting process for many operators still is ahead. "The industry remains in what we believe are the early days of the global upcycle, valuations remain at depressed and attractive levels, and fundamentals are improving in our view," said West.

North America historically has been a "short-cycle market characterized by volatile swings in activity," said West, but the shift toward oil and liquids drilling "has significantly reduced the cyclicality in the region and will result in more consistent spending levels, in our view. Long-term and across cycles, we expect spending growth in North America to remain in the high single digits through at least 2016."

Energy stocks "suggest continuing deterioration" and the sentiment is negative, but "what the market doesn't see is the increase in spending by majors and national oil companies, which recently have acquired acreage in North America," West said during the conference call. The Big Oil producers "don't face the same cash constraints that the independents face, and they represent one-third of U.S. spending, while independents are expected to spend 1% less."

Service prices should decline in the coming year as operators complete their rig turnarounds to oil/liquids from gas basins. "In North America...costs come down significantly with pressure pumping pricing down probably 25% from its peak, and it's down for land rigs in the 10-15% range," said West. Through 2013 "the rig count starts to rebuild and it stabilizes pricing for those services...Leading-edge costs are to remain mostly stable in North America and in the Permian and Bakken, in particular."

Barclays also expects to see "steady improvement" to expand pipeline infrastructure and remove bottlenecks in several areas, including the Bakken. "The Bakken has been a pretty challenging area to conduct business," said West. "We hear stories about [operators] parking frack crews in Walmart parking lots" because of a lack of housing. "They are paying high salaries to drive trucks with oil from North Dakota. It's a tough place to operate now but it should get better."

"We continue to expect the U.S. rig count to bleed lower through the balance of 2012 as capital budgets are largely exhausted and E&Ps that have been running flat-out for two years elect to send their crews home for the holidays," West said. "Activity levels were fairly solid in October and into the Thanksgiving holiday, leading us to believe there will be little spare cash for drilling wells in December.

"The U.S. rig count is off about 10% year-to-date to 1,811 as the natural gas rig count has fallen by 385 rigs or 48%, outpacing the oil rig count increase of 193 rigs or 16%. The U.S. rig count looks on track to average about 1,930 rigs in 2012. This compares to the rig count of 2,007 to start the year. Looking toward 2013, fresh E&P capital budgets equal to 2012 levels imply the rig count needs to grow by at least 120 rigs, or 7%, from current levels to meet that demand, leaving aside the impact of drilling efficiency gains."

Permitting in the GOM "has largely normalized," said the Barclays analyst. "The deepwater rig count is surpassing pre-moratorium levels and will likely reach 45-50 by 2014."

However, Canada's headwinds may continue. "Poor weather conditions, E&P overspending during the peak activity period in 1Q2012, continued lower differentials for some Canadian plays and a more tepid outlook from the Canadian E&P companies coming out of the breakup...have all led to a disappointing year for Canadian spending. Our survey results suggest budgets will fall about 9.5% in 2012 compared to 2011 levels, with flattish activity levels in 2013."

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