Capital expenditures (capex) may have been cut and commodity prices aren’t cooperating, but production at some of the largest U.S.-based independents grew in 2Q2009 from the year-ago period and sequentially from the first three months of this year, according to separate analyses.

Tudor, Pickering, Holt & Co. Securities Inc. (TPH) analysts said the 30 exploration and production (E&P) companies they cover grew 2Q2009 volumes 11% from the year-ago period, which was more than 2% higher than the analysts had forecast. Overall output was 2% higher in the period than in the first three months of 2009, attributed to 2008 acquisitions that partially offset lingering Gulf of Mexico shut-ins.

The early year output gains by E&Ps point to strong growth through 2009, the TPH team said in a note to clients.

“We estimate the 30 companies in our coverage universe will increase production by 8.5% in 2009 and 6% in 2010 (versus 8% and 7% going into earnings),” said the TPH analysts. “In 2009, growth should be driven by 2008 acquisitions, international growth and reallocated capital toward oily projects, while 2010 growth should be helped by more drilling due to higher commodity prices/service cost deflation. Interestingly (but not surprisingly), little guys are growing faster as we forecast large caps only grow 7% in 2009 and 5% in 2010.”

Lower costs were credited for lifting E&Ps above 2Q2009 expectations.

“Drivers were lower fuel/electricity costs, high-grading personnel, efficiency gains from lower drilling activity,” the TPH team wrote. Analysts estimated per-unit costs fell 13% in the quarter from a year ago and were down 4% from 1Q2009. TPH analysts are forecasting full-year 2009 per-unit cost deflation of minus 13%, with cost deflation of minus 3% in 2010.

“Our 30 company coverage universe will generate $42 billion in cash flow this year (prior forecast $41 billion; 2008 was $64 billion),” wrote the TPH analysts. “Better 2009 cash from lower costs and slightly better production…This same group will spend just north of $36 billion in exploration and development capital this year,” which would be down 38% year/year (y/y) from 2008 and 33% lower than original 2009 capex budgets.

“Looking ahead to 2010, we think overall industry cash flow only grows 10% (to $46 billion), despite plus-6% y/y production growth and 20-25% higher y/y benchmark prices, as producers lose strong 2009 hedges that previously protected cash flow,” noted the TPH analysts. “We expect capex budgets will grow by 2% as E&Ps will get more bang for their buck given service cost deflation (more wells per dollars spent)…but they will be fighting against the production declines created by slower overall 2009 activity levels.”.

Separately, SunTrust Robinson Humphrey/the Gerdes Group (STRH) analysts said their E&P coverage universe produced 3% more natural gas and oil than forecast in 2Q2009, while unleveraged cash expenses were 4% below expectations. STRH analysts see continued strong growth through the rest of this year.

“Our full-year coverage production growth expectation increased 1.7 percentage points to 10.6% even though our coverage companies anticipate reducing capital spending almost 40% this year,” the STRH analysts wrote.

STRH’s E&P universe experienced a 6%, or 30 cents/Mcfe improvement, in cash margins “largely due to a contraction in gas price realizations” relative to the New York Mercantile Exchange and lower operating expenses.

“Presently, the relationship between capital spending and the outlook for production implies E&P capital intensity this year is 5% below ’08, though we anticipate the industry will ultimately experience at least 10% capital intensity deflation in accordance with lower oilfield service prices,” said the STRH analysts.

Assuming on average that gas prices are $4.25/Mcf and oil prices average $55/bbl in 2009, “E&P cash margins should contract almost 40%, while gross profit margins should deteriorate over 40%,” STRH analysts said. By next year, however, they expect cash margins to “rebound almost 30% assuming a $7.50 gas/$70 oil price environment.”

Because of financial markets and liquidity concerns, “the E&P industry generally intends to budget capital outlays closer to cash generation going forward,” said the STRH analysts. If gas prices increase to average $7.50/Mcf and oil prices go to $70/bbl, “the E&P industry can increase organic capital outlays 20% and maintain free cash flow neutrality.”

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