The numbers, it seems, don’t tell the entire story. Even thoughoil and gas industry upstream revenues, profits and cash flow areshowing record profits for 1999 compared with the previous year’scollapse, exploration and development spending dropped and provedreserves spending rose significantly, according to ArthurAndersen’s 21st annual Global E&P Trends survey.

E&P companies remain cautions about increasing their capitalspending, and in the long run, this will hurt their stock value,said Arthur Andersen’s Victor A. Burk, managing director of theenergy industry group. He said the slowdown in spending is relatedto the “hard lessons learned” during the oil price collapse of1998.

“Many E&P companies find themselves struggling to convinceinvestors they can create value during a time of strong productprices and cash flow,” Burk said. “If E&P companies cannotcreate value in the marketplace with oil prices at $30 per barreland natural gas prices at $4 per million BTUs, how will they createvalue when prices decline?” he asked.

The survey, released last week in Houston, analyzed 163 publicoil and gas companies worldwide using disclosures of theiractivities through 1999 from annual reports submitted to the U.S.Securities and Exchange Commission and other disclosures by 39non-U.S. reporting companies.

Arthur Andersen’s survey represents an analysis of those withreserves of more than 5 million BOE, about 86% of the U.S. oil andnatural gas liquids reserves and an estimated 64% of U.S. gasreserves. Generally, the entire U.S. and international E&Pindustry is represented, except for a few national oil companies.

“E&P companies face a major challenge of convincinginvestors they can create value,” Burk said. They “must find waysto create and realize value in all their assets,” not just thephysical assets. The value of a company’s employees, its customersand supplier relationships all have to be examined and recognized.”Value can be created and realized in companies’ financial assets,and in their organizational assets such as intangibles, strategyand vision.” Investors today are looking for “value creation”instead of “value realization,” he said.

One company that uses all of its assets well is Enron, Burksaid. Ten years ago, Enron was a “classic old-economics company.”But it remade itself and today has more of the characteristics of atechnology company than a pipeline company. By using not just itsfinancial assets, but also its organizational assets, such as itsintangible assets like vision, strategy and innovation, the companywas able to grow itself into the diversified powerhouse it istoday.

“A purely E&P company is not like Enron, but they can stillfind the value that isn’t recognized, whether that’s in service, orequipment supplies, or a relationship with foreign countries,” Burksaid. “You first need to understand your assets, and what createsvalue in your company, then form a strategy to create value.”

Arthur Andersen’s survey showed U.S. upstream capital spendingdropped 29% to $25.4 billion in 1999, with decreases in unprovedproperty acquisition costs (67%), exploration (36%) and development(28%).

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