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U.S. Leads Lehman Bros. Producer Spending Growth Projections

Producers may grouse about rising costs in the field, but they're going to keep on paying, according to Lehman Brothers latest exploration and production spending survey. Worldwide E&P capital spending is forecast to grow 21.3% this year, a healthy boost from the 14.7% that Lehman projected in its December 2005 survey. The 308 companies in the survey are projected to spend $261 billion.

Lehman analysts James Crandell and Angeline Sedita wrote that the growth from December comes from increased investment domestically and outside North America, the result of adding $21 billion to 2006 budgets, partially offset by a $7 billion overspend of 2005 budgets.

"In our opinion, the substantial rise in 2006 domestic expenditures (now 27.7% versus the 14.9% forecast in December) reflects the strong industry conditions as a result of high commodity prices and inflationary pressure for rigs and services," the analysts wrote. Of surveyed companies, 67% indicated greater E&P spending in 2007 with nearly 72% of these planning double-digit increases.

Surveyed companies have grown more bullish on oil prices but have backed off from their previous consensus on gas prices. Lehman found an average oil target of $55.70/bbl, up from $49.90/bbl in the December survey. The gas price assumption fell to $6.95/Mcf from $7.65/Mcf. "On average, companies said they would reduce spending if oil prices fell to $42/bbl and natural gas prices declined to $5/Mcf.

"At these levels, 28% of respondents said they would cut spending by 10% to 20%, and 32% said spending would be reduced by 20% to 30%. Prices would have to be sustained at this level for a minimum of three to six months to lead to a reduction."

The strongest growth is expected in domestic spending, now forecast to jump 27.7% among 224 companies compared to 14.9% forecast in the December survey. Companies with budgets between $100 million and $1 billion -- most publicly traded U.S. independents -- are exhibiting the strongest spending growth. "These companies are forecasting increases of 30.6% in 2006; this is double the 15.3% improvement that this company group was forecasting in December and is due to upward budget revisions," the analysts wrote. Standouts and their current forecasted spending increases: Southwestern Energy, 71%; Marathon Oil, 45%; El Paso, 41%; Pogo Producing, 67%; Denbury Resources, 66%; Williams Production, 27%; and Quicksilver Resources, more than 100%. (In January Quicksilver said its 2006 capital expenditure budget was $566 million, including $359 million for drilling, $160 million for gathering and processing and $47 million for leasehold acquisitions.)

International spending also is expected to be on the rise, according to the Lehman survey. Two of the super majors are expected to make substantial increases. ConocoPhillips is expected to increase spending by 37%, and Chevron is expected to mark a 21% increase. Five U.S. independents will be making substantial increases as well: Apache, 26%; Occidental Petroleum, 19%; Noble Energy, more than double; Newfield Exploration, more than triple; and Devon Energy, 60%.

Canadian E&P spending also is on the rise, however, by only 14.6% in 2006 compared to 2005 for the 69 companies surveyed. This is just slightly more than the 13.3% increase forecasted by Lehman's December survey. "The modest improvement is due to a 4% increase in 2006 budgets, partially offset by the 3% overspending of 2005 budgets," Lehman analysts wrote. "The unavailability of drilling rigs, a strong Canadian dollar, the timing of projects and the shift in E&P spending by the larger Canadian companies away from North America are leading to more modest increases in Canadian expenditures compared to the rest of the world." Lehman excluded spending in oil sands not directly related to drilling and oil service activity. Of note, Talisman, Canadian Natural Resources, Petro-Canada, and Nexen all are forecasting increases of more than 20% in Canadian E&P spending.

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