A Banc of America Securities (BOA) survey of 23 independent exploration and production (E&P) companies, issued June 11, predicts solid organic production growth, with returns reverting to average historic levels, through 2011.
BOA analysts project that their coverage group will post a compound annual growth rate (CAGR) in organic production of 6.2% for the five-year period ending 2011, compared to a 2% CAGR over the past five years. The companies from the coverage group that BOA projects will post the greatest organic production increases over the next five years are Southwestern Energy (SWN), Geomet, Quicksilver Resources, Chesapeake Energy, XTO Energy (XTO) and Cabot Oil & Gas. All eight are expected to derive much of their growth from onshore North America resource plays.
During the same period BOA predicts that the same companies' return on capital employed, which fell last year to approximately 13.4% from a 10-year high of 15% in 2005, will "slowly but steadily decline through 2011."
BOA's measure of returns for the coverage group -- reserve replacement efficiency (RRE) -- dropped from a ten-year high in 2005 to in-line with the historical average (1.7x) last year, and is projected to remain at about that level for the next five years. Companies in the coverage group expected to post the highest average RRE over the next five years include SWN, XTO and Occidental Petroleum.
BOA believes that XTO, SWN, Nexen Inc. and EOG Resources are best positioned within the coverage group to deliver a combination of production growth, free cash flow yield, and RRE over the next five years.Whiting Petroleum, Stone Energy and Pogo Producing are the worst positioned companies in the coverage group, based on the BOA analysis.
The coverage group will generate nearly $125 billion of free cash flow -- after-tax cash flow minus estimated maintenance capital expenditures -- over the next five years, BOA believes. Approximately 75% of that amount is expected to be reinvested to grow production, leaving about $30 billion for potential acquisitions, share repurchases, debt repayment and dividend increases.
E&P managements expect West Texas intermediate spot oil and natural gas prices to average about $60/bbl and $7.20/MMBtu, respectively, over the next five years, compared with $56/bbl and $7.45/MMBtu in a BOA survey taken in 2006.
The report updated the five-year outlook for BOA's E&P coverage group, extending the company's operating models through 2011 based on historical and prospective industry trends, company-specific development projects/plays and BOA's current commodity price outlook. BOA analysts also surveyed the managements of the E&P sector to get their perspective on longer-term industry trends and expectations. Other companies in the coverage group are Devon Energy, Forest Oil, Newfield Exploration, Canadian Natural Resources, Apache Corp., EnCana Corp., Talisman Energy, Noble Energy, Comstock Resources, Pioneer Natural Resources and Anadarko Petroleum.
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