Even with the downturn in commodity markets, exploration and production (E&P) companies appear "more than willing" to continue investing this year in the drillbit and in acquisitions, according to an informal survey by Raymond James & Associates energy analysts.
Analysts J. Marshall Adkins, Wayne Andrews and Pavel Molchanov said in the weekly "Stat of the Week" that they spoke with the management teams of about 40 E&P companies at the recent North American Prospect Expo (NAPE) in Houston. Price expectations were "certainly tempered," compared with 2005 and 2006, but most expect prices to rebound over the year. "Similarly, many believe that capital spending will post yet another annual increase in 2007, albeit smaller than the 20%-plus seen in 2006," they wrote.
According to the analysts, industry insiders expect 2007 prices to average around 5% higher than Wall Street expectations. Those surveyed said the average gas price would be $7.73/Mcf, with a high of $9.92 and a low of $6.25. (First Call's consensus estimate is $7.20/Mcf; Raymond James' is $7.50.) Within a "fairly narrow range of estimates," increased drilling was expected to be the "best way" to spend the extra capital.
About one-third of the 52 E&Ps covered by Raymond James have announced their 2007 capital spending budgets. In that context, the analysts said the preliminary results "are surprisingly bullish..." Nearly all of those surveyed told Raymond James analysts they will boost their capital expenditures -- some by as much as 30%.
"At a minimum, we think that the average E&P budget in 2007 will be up around 5%," and assuming relatively flat commodity prices this year, the budget increases most likely will be funded by production growth and increased cash flow from hedges in place, the analysts wrote. Only a "limited subset of prospects" would be marginal for drilling under sustained lower natural gas prices.
"The overall view was that the gas strip would have to drop to below $7.00, and stay there, to see a material reduction in drilling activity," the analysts wrote.
Merger and acquisition (M&A) activity also is expected to remain strong and be diverse, running the spectrum from building net asset value in long-lived properties, to investing in high-return, risk-weighted projects. Acquisitions will remain steady, "especially if asset values were to moderate, because astute buyers with a bullish long-term outlook could then snap up properties at attractive prices. Most companies still emphasize asset deals, though corporate M&A remains an option for many large-cap and mid-cap producers."
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