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E&P Capex Aggressively Targeting Lower 48

Natural gas and oil production continues to explode in the United States, and capital spending appears to be just as aggressive, Raymond James & Associates Inc. has found.

Analyst Pavel Molchanov and a team reviewed 10 U.S.-based exploration and production (E&P) operators and 10 multinationals to understand the level of capital expenditures in the past few years. Just looking at the capital expenditures (capex) alone, overall spending has been flat for the past two years or so and is set to decline on average by 6% from 2013.

Taking into account all of the restructuring activity and asset sales by E&Ps over the past two years, however, capex on a pro forma basis appears flat from 2013. It just depends on where an E&P focuses its capex, Molchanov noted.

"If we were to include all mid-caps and small-caps among U.S. pure-plays, the domestic industry's aggregate spending growth in 2014 is likely to be close to our aforementioned prediction of 15%," which Raymond James had forecast for the oilfield sector in February (see Shale Daily, Feb. 24).

"The U.S. (more specifically, onshore Lower 48) clearly stands out as an area where capital spending is on the rise against the general backdrop of flat-to-down spending," Molchanov said.

The U.S.-based companies reviewed were Anadarko Petroleum Corp., Apache Corp., Chevron Corp., ConocoPhillips, ExxonMobil Corp., Hess Corp., Marathon Oil Corp., Murphy Oil Corp., Noble Energy Inc. and Occidental Petroleum Corp.

Multinationals use a portfolio approach to determine how to divvy outlays to various components. U.S.-focused operators "are clearly more aggressive" in capex plans, said the analyst.

International companies reviewed were BG Group, BP plc, Ecopetrol SA, Eni SA, OMV Group, Petroleo Brasilerio SA, Royal Dutch Shell plc, Suncor Energy, Talisman Energy Inc. and Total SA.

"The combination of rapidly increasing U.S. oil production and a big year/year jump in domestic natural gas prices is driving cash flow expansion and hence ample room for operators to reinvest without going to the proverbial bank."

There is less clarity about capex in many countries and those E&Ps not listed publicly, including OPEC operators and Russia, Mexico and Kazakhstan. That's why the analysts only focused on a representative sample of companies that were publicly traded.

Based on high-level data from the Wood Mackenzie consultancy, Raymond James team estimated that the 20 E&Ps comprise about half of global upstream spending for shales, deepwater, oilsands, liquefied natural gas and frontier exploration.

North America has overweighted spending in the research, but in fact the United States and Canada are where a disproportionate amount of capital investment is currently going.

"But we deliberately excluded companies that have solely U.S. operations from our global sample," Molchanov noted. "While around half of these companies have some assets other than upstream (refining/marketing, pipelines, etc.), the overwhelming majority of the spending is allocated to upstream projects."

Aggregate capex for the 20 companies peaked in 2013, up 36% from 2012 and 11% annualized since 2010. Overall for 2014 and 2015, capex doesn't appear to be growing. Raymond James estimates an aggregate decline of 2% this year and 1% in 2015. But that's for everybody. For North American-focused operators, it's a different scenario.

"Given our projections that global oil supply will increase 2.6% in 2014 and 2.7% in 2015 -- with almost all of this coming from North America -- it is simply not realistic for globally diversified companies to dramatically ramp up spending and still 'live within their means,'" the analyst said. Global operators have management teams that "are, by their nature, conservatively oriented, i.e., you don’t become CEO of Exxon by rocking the boat.

"And even if the companies were inclined to throw discipline to the wind and aggressively outspend their cash flow, the reality is that the market would severely penalize any such decisions..."

Specifically, the onshore Lower 48 stands out as an area where capex is rising against a general global retreat. That bodes well for the oilfield service operators, too.

U.S. land "is the place to be currently," said Molchanov. "The fundamental positives stem from our expectations that E&P capex growth targets y/y could be closer to the 10-15% range compared to consensus at 5-7%. We anticipate that this discrepancy along with improving rig efficiencies and fracture technologies will raise pressure pumping utilization from the current 75% range closer to 90% in late 2014/early 2015."

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