E&P Programs Seeing the Money

The 2001 mantra of most North American exploration and production companies could be the oft-quoted line from the 1996 movie Jerry Maguire: "Show Me The Money!" Driven by the continued strong interest in North America and sustained high energy prices, both majors and independents have upped their capital spending budgets for the coming year. Most target domestic natural gas projects.

Companies already making announcements about double-digit E&P increases last week include U.S.-based Phillips Petroleum, Unocal Corp. and Mitchell Energy & Development Corp. and Canadian-based Alberta Energy Company Ltd. and Gulf Canada (see Daily GPI, Dec. 15). But the announcements continue, and most are expected to boost spending in exploitation and development projects, according to Salomon Smith Barney.

E&P stocks, which are up about 40% on the Standard & Poors index of oil and gas companies, are poised for even more gains and should provide a "shelter from the storm," according to Salomon Smith Barney analysts. Robert Morris and Michael Schmitz said they "continue to view the longer-term risk/reward profile for our coverage group to be quite favorable, on average, with a particular affinity for some of the more natural gas-leveraged names."

Driven by the increased drilling for natural gas in North America and increased E&P in the rest of the world, Salomon Smith Barney analysts Geoff Kieburtz and Mark Urness predict North American E&P spending to rise 19.6% next year. Spending in the rest of the world is expected to grow by 20.6% in 2001 after an 8.4% increase this year.

Deutsche Banc Alex. Brown analysts David Bradshaw and John Bailey said that "strong evidence continues to mount that suggests the upstream cycle will prove to be stronger for longer than most trackers have been willing to concede. We also believe that E&P stocks, on balance are inviting, and most important, that investors are, at long last, becoming appreciative of the basics as well as the nuances of the sterling near- and extended-term environment."

Bradshaw and Bailey noted that "prospects for the natural gas sector are exceptional and are likely to get better. Operational performance continues to outstrip expectations as a broad-based repositioning of the sector gave rise to tightened cost structures and strengthened balance sheets, thereby enhancing leverage to solid hydrocarbon markets and volume gains."

Energy companies announcing boosts to their E&P budgets in recent days include:

  • Devon Energy: This Oklahoma City-based company announced an initial 2001 exploration and development budget of $1.05 billion to $1.15 billion, a 20% to 30% increase over 2000. Nearly 76% of its assets are in North American natural gas, and much of the increase will go toward domestic production.

  • Ocean Energy: The board of directors of this Houston company approved a capital investment program of $700 million for the coming year, a 22% increase over estimated 2000 spending of $575 million. Ocean plans to boost its development in deepwater Gulf of Mexico, where the company plans to spend up to $350 million to grow its reserve base. Another $125 million to $175 million will be spent to enhance production in the Bossier natural gas play in East Texas.

  • Cabot Oil & Gas Corp.: This independent, based in New York, approved a capital budget of $167 million for 2001, a 37% increase from 2000. Of the total, $112 million will fund drilling projects, with 42% for exploration wells and 58% for development wells.

  • Shenandoah Energy: The Denver-based company's board approved a $73 million capital budget for 2001, a 10% increase from 2000. About 91% will be spent on upstream projects, with $56.9 million directed toward 103 Wasatach natural gas wells and 28 Green River crude wells.

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