Global exploration and production (E&P) spending is forecast to hit a record $678 billion in 2013, 10% higher than in 2012 and up more than 300 basis points from planned spending six months ago, according to Barclays Capital.
This year represents the fourth consecutive year of double-digit worldwide spending gains since the 2009 downturn, said analyst James West, who issued an updated global E&P spending survey on Tuesday. The initial spending outlook for 2013, published last December, resulted from an annual survey of more than 300 E&Ps worldwide that were quizzed about spending intentions (see Daily GPI, Dec. 5, 2012). Over the past month, West and his team revisited their forecasts to see if anything had changed. What they discovered is that E&Ps are more optimistic today than they were in December and even more positive about growth in the coming years.
“We believe the results of our spending outlook, especially the continued growth internationally and offshore, and rebounding activity in North America, support our constructive view on the group,” he said. “The industry remains in what we believe are the early days of a long and powerful global up-cycle, valuations remain at attractive levels, and fundamentals continue to improve.”
The “outlook for next year is starting to take hold, and we anticipate further substantial gains internationally, more oil-related activity and the start of a natgas cycle in North America. Only 6% of the companies we surveyed anticipate a decline in 2014 E&P spending.
“We expect spending in North America to increase roughly 2% in 2013, with positive growth in the U.S. somewhat offset by a year/year decline in Canada,” he said. U.S. E&P capex now is expected to increase 3.4% to $146 billion, versus year-ago spending of $141 billion. Canadian capex is predicted to hit C$42 billion from C$43 billion.
“Despite a slower start to the year than some expected, we think activity levels in the U.S. are improving and, given the conservative commodity price assumptions currently driving spending, we think North American E&Ps could be in position to outspend their budgets by the end of the year,” West said.
Operator assumptions for natural gas and oil are relatively conservative, said the Barclays analyst.
“Current forecasts for 2013 Henry Hub prices average $3.62/MMBtu compared to expectations for $3.47/MMBtu back in December,” he said. “Both forecasts are below the realized 2013 year-to-date average of $3.75 and current levels of roughly $4.00.
“Natural gas prices have been particularly strong since the start of 2Q2013, averaging over $4.10.” Barclays currently is forecasting $4.00/MMBtu gas prices for 3Q2013 and $4.10 for 4Q2013. “We think these levels are supportive of an uptick in activity in low-cost gas basins,” including the Marcellus, Cana Woodford, and portions of the Barnett and Utica shales.
A material increase in activity in major U.S. gas basins “would likely require sustained prices above the $5.00 level, an outcome we think is unlikely to materialize this year,” said West. An exception, he said, is Encana Corp., which has increased its rig count in the Haynesville Shale (see Daily GPI, Feb. 15).
“However, with gas prices expected to surpass E&P forecasts the remainder of the year, we expect a number of operators will direct excess cash flows from the gas plays to oil plays. We continue to be bullish on activity levels in the Bakken, Eagle Ford, Permian, Mississippian Lime and the Gulf of Mexico, where deepwater activity is surging.”
North American operators benchmarking capital budgets off West Texas Intermediate (WTI) have increased their 2013 price assumptions since the December survey, “but not materially,” said West. “Operators are currently budgeting for an average 2013 WTI price of $86.50/bbl, compared to a forecast average of $84.50/bbl in early December. Both levels are well below year-to-date actual prices for WTI, which have averaged roughly $94 since the start of the year.”
The biggest boost to global capital spending (capex) is coming from areas of the Eastern Hemisphere, highlighted by the fact that PetroChina, the largest oil producer in China, is expected to be the largest E&P spender this year, overtaking ExxonMobil Corp. for the first time since data collection began in the mid-1980s, West said.
Supermajors, redefined by Barclays this year as operators with capex budgets of more than $15 billion globally, are forecast to spend $38.8 billion in the United States this year, 10% more than in 2012, driven largely by increased budgeting by China’s CNOOC Ltd., an arm of state-controlled China National Offshore Oil Co.
“We believe these increases are driven primarily by steadily increasing spending in the U.S. land market and the substantial activity growth that is unfolding in the U.S. Gulf of Mexico,” West said. Worldwide, the supermajors account for about 45% of the global E&P market. All of the supermajors have upped their spending plans this year, with the exception of Mexico’s Petroleos Mexicanos and Norway’s Statoil ASA.
Spending by the “traditional majors” this year also is strengthening and on pace to increase globally by 11.4%, compared with 8.9% in December, West said. “Spending is led by more active-than-expected previously drilling and exploration programs” for Chevron Corp. (up 29% from 17% in December) and ConocoPhillips, Royal Dutch Shell plc, Total SA, BP plc and ExxonMobil, all of which plan to hike spending by more than 5%.
In part because one of the leading U.S. drillers, Chesapeake Energy Corp. has trimmed its spending plans for this year, Barclays now expects the top three spenders in the United States will be majors: ExxonMobil Corp., Chevron, BP plc, and the fourth will be super independent ConocoPhillips. “Chesapeake’s $6 billion drilling and completion budget places it in the fifth spot, down from the No. 2 position last year,” West said.
“The spending plans for each of the four ‘traditional majors’ expected to lead U.S. activity are all up year/year, with the aggregate budget across the companies roughly 5% higher in 2013 relative to 2012. Last year, we highlighted the positive impact of the majors’ presence in the U.S. market, and we continue to believe that higher spending levels by large, sophisticated operators will help stabilize revenue streams for large-cap service providers.”
Meanwhile, the spending patterns by the bulk of the U.S. market (large and mid-size independents) are mixed “as geographic disposition across various basins and company specific initiatives appear to be driving current plans,” he said. For instance, two of the largest U.S. independents, Anadarko Petroleum Corp. and Apache Corp., “are expected to increase spending relative to last year, while another traditional power, Occidental Petroleum Corp., is forecast to decrease its allocation to U.S. operations.”
Canadian producers are indicating “cautious optimism” for the second half of 2013, West said.
“The more optimistic tone is being driven by increasingly accommodating natural gas prices, significantly narrower oil differentials and lower service costs. Canadian gas prices (AECO) have averaged $3.35/MMcf thus far in 2013,” which is 65% ahead of the first half of 2012 and 40% more than 2012 averages. However, heavy Canadian crude differentials “have narrowed to $17.50/bbl on average thus far in 2Q2013, from as much as $40/bbl in 4Q2012…”
Only 16% of all the E&Ps surveyed said they would boost spending through the year if natural gas averaged $4.00/MMBtu, and only 18% said they might increase spending if WTI ticked higher than $90/bbl.
“Not surprisingly, the responses were skewed towards an uptick in spending from current budget plans,” said West. “No companies indicated that current price levels would lead to a decline in planned spending, which we think provides strong evidence that actual E&P spend will outpace current expectations.”
The U.S. Gulf of Mexico (GOM) will continue to be a bright spot for domestic explorers. “We estimate the Gulf of Mexico, both deepwater and shelf, makes up 12-15% of the total U.S. spend. Operator activity in the Gulf of Mexico has been strong of late, particularly in the deepwater, and should accelerate further during the remainder of the year.”
Barclays is tracking 16 incremental floaters scheduled to enter the market through 1Q2015, four of which are slated to begin work this year. “We think the total floater count could reach 60 by 2015 (up from 37 today) as recent discoveries in the Lower Tertiary are fueling intense interest from the traditional majors, state oil companies and large independents.”
The deepwater GOM also “is an enticing prize for service companies,” but it takes a lot of money, West said. “The large cap diversifieds have an edge in the drilling and completion market as the customer mix and extremely challenging operating conditions are formidable barriers to entry and generally prevent smaller service companies from competing.”
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