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North American E&Ps Raise Spending Predictions

North American exploration and production (E&P) spending in North America is expected to jump substantially in 2011 and is much higher than forecasted six months ago, according to the latest worldwide spending survey by Dahlman Rose & Co.

"The Original E&P Spending Survey: Midyear Update" was initiated in 1982 by energy analyst Jim Crandell when he worked at another firm. He and colleagues Omar M. Nokta and Scott Willis compiled the latest survey using data from 445 integrated oil companies, independents and national oil companies worldwide.

"This represents the largest survey ever in the 30 years we have conducted it," said Crandell and his team. "The forecast increase in 2011 compared with companies' original intentions six months ago is entirely attributed to North America, with international expectations of growth about the same."

Based on their compilation, worldwide E&P expenditures are expected to jump by 14% this year to $533 million. U.S. spending leads, with expenditures for 237 companies surveyed now predicted to be up by 22% to $122 billion.

"The reasons for the increased spending growth in the U.S. in 2011 are significantly higher oil price expectations, slightly higher natural gas price expectations, better cash flows and the considerable success the companies have had drilling horizontally in the shales," said the analysts. "This is particularly true in the liquids-rich plays such as the Eagle Ford Shale and the oil shales, such as the Bakken Shale. Many of the larger independents have made substantial upward revisions to their estimates over the past six months."

Companies surveyed basing their spending estimates on an average U.S. crude price assumption of $87.31/bbl and an average natural gas price of $4.53/Mcf in 2011, said Crandell. "This is up significantly for oil and modestly for natural gas over the past six months."

Canadian producers' spending also has been "revised significantly higher over the past six months," the analysts said. Canadian E&Ps plan to spend 16% more than they did in 2010, or $42 billion.

"Like in the U.S., the gains have been primarily driven by higher oil price expectations and success in both conventional and unconventional drilling," said the trio.

Money spent outside North America "should also show attractive growth in 2011 and be a bit skewed toward the second half." Of the 153 companies surveyed that spent money internationally, the analysts predicted a jump in spending of 12% in 2011, which is "similar to what was expected six months ago."

More than half of the companies surveyed (56%) "believe their E&P spending will be higher in 2012, with 37% suggesting flattish expenditures, and 7% estimating lower. Of those indicating higher E&P spending, 63% believe it will be up in 2012 by more than 10% and 27% up by more than 20%."

The survey's results bode well not only for E&Ps but also for oil service stocks, said the energy analysts.

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