Exploration and development (E&D) spending, the largest component of capital expenditures for many of the top U.S. independents, grew 32% in the first six months of 2004 versus a year earlier, and capital budgets are expected to keep climbing, according to a survey by Raymond James’ analysts.
According to a survey of 32 top producers, mid-year budget increases are averaging 7%, but Raymond James’ analysts expect that number to climb substantially by the end of the year.
“To put this in context, initial budgets in early 2003 were $12.4 billion and updated mid-year budgets were $13.7 billion, a 10% increase. In total, the revised budgets for full-year 2004 stand at $16.7 billion. However…we believe that companies will outspend even these higher budgets. Our updated forecast is for E&D to total roughly $18.7 billion, implying growth of 32% over actual 2003 spending and 20% over the initial 2004 budgets.” The increased budgets still would leave “plenty of room for debt repayment or stock buyback.”
Last year, producers covered by Raymond James favored E&D spending and acquisitions for allocating cash flow from operations. “For 2004, we had originally projected a noticeable shift toward more E&D spending. However, given the significant number of property acquisitions completed…we now believe that the percentage of cash flow spent on E&D should remain around the 70% level.” Included among the “most prolific acquirers” this year are XTO Energy, Chesapeake Energy and Apache Corp.
Assuming E&D spending is near 70%, drilling spending should be up 27-35%, according to the analysts. The full-year E&D forecast of $18.7 billion for the universe implies $10.1 billion of spending in the last six months of 2004, “which would be about 17% higher than the amount spent in the first half. In other words, spending is likely to be somewhat back-end loaded. this bodes well for drilling activity in the second half.”
The analysts offered a caveat: “our universe is not necessarily representative of the entire industry.” They noted that the spending analysis only represents about 20% of U.S. production, and the 32 companies surveyed “pursue among the most aggressive drilling programs in the industry — not to mention the fact that they have some of the best drilling prospects.” In particular, they noted that U.S. drilling activity by the majors has been essentially flat for the past year, and in the second half of 2004, the majors are unlikely to grow their E&D spending by more than 5%.
“At the same time, we continue to believe that 2004 E&D spending by independents outside our coverage universe should post smaller, but still solid, growth of about 10%.”
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