Profits in the oil and natural gas industry are skyrocketing, but the pressure to keep share prices rising has crushed new field exploration and escalated merger and acquisition (M&A) activity, a trend that is expected to continue this year, the chairman of John S. Herold said Tuesday.

Herold Chairman Art Smith, who spoke during one of the energy consultant’s monthly webcasts, said research indicates exploration spending is down for public, private and national oil companies around the world. The wildcatters have been replaced by cautious investors, he said.

“We know we are addicted to oil. However, it appears we just don’t want to explore for it anymore. Petroleum exploration is declining while cash flow has been rising at a strong pace for the last five years. In previous times, [producers] spent it. That has not been the case of late.”

A Herold review of 205 global energy companies indicated total upstream investments between 2001 and 2005 topped $1 trillion. In that period, drillbit investments totaled $770 billion, and development capital spending nearly doubled. However, exploration spending overall only grew by 50%.

“All ratios around the world are coming down,” Smith said. “Companies are focused on development over exploration.”

The data was especially telling in 2005, when upstream spending for the group reviewed jumped 31% over 2004, Smith noted. In 2005, the companies invested a total of $277 billion for their capital spending programs. With that total investment, the companies increased their reserves by a total of 258 billion boe; production grew 19 billion boe. For the group, oil production in 2005 totaled 35 million bbl/d, and natural gas production totaled 107 Bcf/d.

“Investment outlays in exploration declined by about 16% in 2005,” said Smith. “Between 1986 and 1990, exploration spending was about 25% of a company’s budget, on average, and it ranged between 21% and 29% of the capital budget for the upstream. We’ve seen a rather dramatic decline in exploration in overall capital expenditures.”

Referring to the 1956 movie classic, Smith asked, “Remember the movie Giant? James Dean played the wildcatter [Jett Rink], and he was loved at the time, but wildcatters are not loved today. The risk-seeking oil man is no longer swinging for the fences. There are only a few new wildcatters…white-knuckle explorers…Oil and gas should fulfill the most adventurous, but the investment community doesn’t thrive on that. And Wall Street is risk averse.”

There “clearly has been a move to North America to resource plays, which are less volatile with more predictable economics…But the big debate is not what has been found in the past, but what will be found in the future.”

Share repurchases will continue to be one of the more favored avenues for production profits, said Smith. Herold research also indicates a continuing move toward converting assets to master limited partnerships or trusts, and a lot more M&A.

“The present value of newfield exploration activity is much diminished, leading us to the not-so-surprising conclusion that with no development opportunities, companies will be under merger and acquisition scrutiny going forward,” said Smith. “If you’ve got something in an undeveloped phase that can be developed, whether it’s oilsands, shale…stranded gas, you are a target.”

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