Analysts at Raymond James and Associates said they are expecting exploration and development (E&D) capital spending budgets to continue to increase in 2004 despite rising a massive 41% in 2003 from last year. The analysts believe gas and oil market fundamentals will remain strong, there will be fewer assets available for purchases, and that E&P companies will focus on stock buyback and debt reduction plans only about as much as they had in 2003.

“E&D spending for [the 29 E&P] companies [we follow] should post another substantial (15-30%) gain in 2004,” said analyst Wayne Andrews. “While not quite as massive as this year 41% increase, it is important to keep in mind that 2004 increases will be from a much higher base.”

While the 29 companies in Raymond James’s coverage universe don’t necessarily represent the rest of the industry, Andrews said he also expects spending by the majors and remaining independents to continue rising by 5 and 10%, respectively, compared to 2003 spending levels.

Raymond James expects industry fundamentals to remain strong, resulting in continued high cash flow and profitability among E&P companies. Specifically, Andrews said that he is expecting a 12% increase in cash flows among his group of 29 companies, a modest drop in oil prices ($30.98 to $28/bbl) and a 2% increase in gas prices to $5.50/Mcf from $5.39.

He also projects that spending on acquisitions should fall in 2004 from the $4.3 billion in 2003. “The majors whose North American divestitures drove much of this brisk acquisition activity in 2003, are unlikely to continue selling off their properties at the rate they have over the past 12 months,” said Andrews. “We believe the majors have adopted a strategy of minimally investing in North American gas properties in order to redeploy capital and personnel towards larger-scale, longer-term, global liquefied natural gas projects.

“The majors are likely to let their existing gas assets decline and are as yet showing little willingness to divest these assets,” he added. “Additionally, the volume of M&A activity by independents will likely moderate in 2004 due to higher values in the asset market and a reduction in the number of distressed sellers.”

Andrews also said he is expecting only a slight increase in debt reduction and stock buyback activities in 2004. His base case scenario calls for flat financial spending at $.03 billion. Even if financial spending rise, however, he still expects E&D spending to rise by 15%. He said most of the balance sheets of the 29 companies in his coverage universe are “vastly better than 2-3 years ago,” and therefore, “excessive focus on debt reduction would not be an optimal long-term strategy.”

As a result, E&D spending should increase by about 22% for the 29 companies in Raymond James’s coverage universe, 10% among other independents, 5% among the majors and utilities and about 12% overall.

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