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Raymond James: E&Ps Expect Robust Prices, Higher Spending in '06

Most exploration and production (E&P) companies expect robust commodity prices to continue, and many believe growth in capital spending this year will be even more substantial than what has been officially budgeted so far, Raymond James analysts said Monday.

In comments from the North American Prospects Expo (NAPE) in Houston last week, analysts J. Marshall Adkins, Wayne Andrews and Pavel Molchanov said the general attitude among most E&P companies attending was positive. Among other things, their informal survey of about 40 E&P and oilfield service executives suggests that industry insiders expect natural gas and oil prices to average 5-15% higher than Wall Street expectations, which would mean earnings, cash flows and spending expectations of many energy analysts are likely conservative.

"The group's average forecast was $9.26/Mcf, with a high of $11.65 and a low of $7.50," they wrote. "This compares to a current First Call consensus [average] of $8.85." Average oil price forecasts for the NAPE group were $64.25/bbl, with a high of $82 and a low of $50. Raymond James' current 2006 forecast calls for gas prices to average $9.31/Mcf, with oil prices averaging around $59.25/bbl.

Analysts also questioned attendees about capital spending this year. "The broadly held view was that long-term budgeted expectations are almost certainly too conservative. If commodity prices do remain above expectations, spending levels could be meaningfully higher. In fact, many companies seem to be 'front-end loading' their budgets with the expectation of increasing spending if energy prices hold up. Assuming our 2006 commodity price forecast proves correct, the E&P space would be swimming in free cash flow."

However, those surveyed said even with the cash flow, constraints in rig and labor availability are "an even greater challenge for producers than rising costs."

Still, the overall outlook for capital expenditures is bullish, said the analysts. When asked if any of the E&Ps would lay off rigs if oil fell to $45 and gas fell to $7.50, "the overall view was that gas would have to drop below $7, maybe even below $6.50, and stay there, to see a meaningful reduction in drilling activity."

Executives also believe merger and acquisition (M&A) activity "will continue at its current robust pace, and may even accelerate further." Given the tightness in the service markets, mergers such as the one announced last month by Cal Dive and Remington Oil & Gas Co. "are likely to continue, in addition to ongoing efforts by some producers, such as Chesapeake Energy to build their own rig fleets" (see Daily GPI, Jan. 24).

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