Costs for U.S.-based exploration and production (E&P) companies are expected to remain high this year, but as a whole most of them are again pursuing aggressive capital programs in 2007, Standard & Poor's RatingsDirect said in a report. Many E&Ps, including Occidental Petroleum Corp., Devon Energy Corp, XTO Energy Inc. and EOG Resources Inc., have upped capital spending by 10-20% year-over-year, with only a few, including Anadarko Petroleum Corp., expected to focus on debt reduction.

Relative to historic levels, S&P said Henry Hub gas prices and North American rig counts now are at "constructive" levels. "As of early 2007, Henry Hub prices were averaging in the mid-$7 area, with the North American rig count holding fairly steady at above 1,800 despite some contraction in the Canadian rig count."

Analysts said that the cold second half of winter "somewhat eased our North American natural gas price concerns, as Henry Hub prices averaged $7.35/Mcf during the first quarter. S&P is maintaining its 2007 pricing assumptions of $5.50/Mcf for Henry Hub gas.

Producers are expected to benefit from a downturn in North American oilfield service pricing this year. The oilfield sector experienced a record year for financial performance in 2006. However, this year the onshore North American services market, particularly in western Canada, has "undoubtedly weakened," S&P noted. Analysts said that anecdotally, there are reports of 10-15% price decreases within some product/service lines in some regions.

"The storage overhang is not as problematic, but the growth in drilling activity has been tempered over the past few months," which "will likely result in weaker performance by a handful of North American-focused oilfield service providers."

The report indicated that E&Ps and oilfield services ratings should remain stable "despite positive price trends." Reserve replacement results were generally good last year, with E&Ps taking advantage of high commodity prices to increase capital expenditures meaningfully." XTO's results "in particular" exceeded expectations, while Anadarko's high finding and development costs were a concern, analysts noted.

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