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Report: E&P Company Profits Up, Spending Down

Report: E&P Company Profits Up, Spending Down

The numbers, it seems, don't tell the entire story. Even though oil and gas industry upstream revenues, profits and cash flow are showing record profits for 1999 compared with the previous year's collapse, exploration and development spending dropped and proved reserves spending rose significantly, according to Arthur Andersen's 21st annual Global E&P Trends survey.

E&P companies remain cautions about increasing their capital spending, and in the long run, this will hurt their stock value, said Arthur Andersen's Victor A. Burk, managing director of the energy industry group. He said the slowdown in spending is related to the "hard lessons learned" during the oil price collapse of 1998.

"Many E&P companies find themselves struggling to convince investors they can create value during a time of strong product prices and cash flow," Burk said. "If E&P companies cannot create value in the marketplace with oil prices at $30 per barrel and natural gas prices at $4 per million BTUs, how will they create value when prices decline?" he asked.

The survey, released last week in Houston, analyzed 163 public oil and gas companies worldwide using disclosures of their activities through 1999 from annual reports submitted to the U.S. Securities and Exchange Commission and other disclosures by 39 non-U.S. reporting companies.

Arthur Andersen's survey represents an analysis of those with reserves of more than 5 million BOE, about 86% of the U.S. oil and natural gas liquids reserves and an estimated 64% of U.S. gas reserves. Generally, the entire U.S. and international E&P industry is represented, except for a few national oil companies.

"E&P companies face a major challenge of convincing investors they can create value," Burk said. They "must find ways to create and realize value in all their assets," not just the physical assets. The value of a company's employees, its customers and supplier relationships all have to be examined and recognized. "Value can be created and realized in companies' financial assets, and in their organizational assets such as intangibles, strategy and vision." Investors today are looking for "value creation" instead of "value realization," he said.

One company that uses all of its assets well is Enron, Burk said. Ten years ago, Enron was a "classic old-economics company." But it remade itself and today has more of the characteristics of a technology company than a pipeline company. By using not just its financial assets, but also its organizational assets, such as its intangible assets like vision, strategy and innovation, the company was able to grow itself into the diversified powerhouse it is today.

"A purely E&P company is not like Enron, but they can still find the value that isn't recognized, whether that's in service, or equipment supplies, or a relationship with foreign countries," Burk said. "You first need to understand your assets, and what creates value in your company, then form a strategy to create value."

Arthur Andersen's survey showed U.S. upstream capital spending dropped 29% to $25.4 billion in 1999, with decreases in unproved property acquisition costs (67%), exploration (36%) and development (28%).

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