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February 2012 Exclusive Story

Surveys Forecast Increased CAPEX Programs

By Tim Beims

Fueled by strengthening oil prices, an IHS Herold report conducted last fall estimated 2011 exploration, drilling and production capital spending was on track to increase by 12 percent over 2010.

The report reviewed the capital budgets of 139 publicly traded oil and gas companies. IHS Herold notes that U.S. master limited partnerships, which were riding strong cash flows from a predominantly crude oil base, had increased spending last year by 43 percent, following an 83 percent jump in 2010. Midsized U.S. independents had ramped up spending by 25 percent, and large North American independents were increasing capital outlays by a more modest 3 percent, led by Pioneer Natural Resources’ 53 percent increase to target prospects in the Spraberry and Eagle Ford Shale plays, the report states.

U.S. integrated oil and gas companies had grown capital spending by 14 percent, paced by Marathon Oil’s 37 percent increase in its drilling programs in the Anadarko Woodford, Niobrara and Bakken Shale plays, according to IHS Herold. Meanwhile, spending among global integrated oil and gas companies was up 9 percent last year, while Canadian integrated oil companies had boosted their CAPEX programs by 13 percent.

Looking forward, upstream spending is expected to continue climbing in 2012, according to industry surveys of executives at oil and gas companies. Reflecting the optimism of respondents to The American Oil & Gas Reporter’s annual Survey of Independent Operators, in which respondents said they planned to expand their 2012 drilling activity by 37.6 percent (AOGR, January 2012, pg. 95), the trend toward higher spending levels will be most pronounced in the United States, reports a survey conducted by Dahlman Rose & Co.

Global capital spending is projected to rise 9.3 percent this year to a record $595 billion, with Dahlman Rose & Co. citing increased outlays in unconventional shale resources in North America and international deepwater projects. However, the largest increase is projected in the United States, where the survey results indicate a double-digit CAPEX boost compared with 2011. According to Dahlman Rose, the 11 percent increase represents the largest expected growth for any region in 2012, and marks the third consecutive year of U.S. spending gains.

Noting that major integrated and international companies are investing substantial sums in U.S. shale plays, the survey says spending is driven mostly by horizontal drilling for crude oil and liquids-rich natural gas reserves.

International exploration and production spending is forecast to increase 9 percent this year, denoting a second straight year of growth. Dahlman Rose says the regions with the largest anticipated year-to-year gains are Africa and Asia-Pacific, with the areas of slowest growth in Russia, Latin America and Europe. Major and international companies are expected to lead the growth in global spending, but the study also forecasts higher capital expenditures by North American independents in international exploration and production projects.

Record Spending Level

Meanwhile, a survey of 350 oil and gas companies by Barclays Capital forecasts a record level of worldwide exploration, drilling and production spending in 2012, but says the rate of growth will slow from a year ago, in part because of wariness about continued economic uncertainty. The $598 billion in expected spending is up 10 percent from $544 billion in 2011.

According to Barclays Capital, North American upstream spending grew by 31 percent last year, but is expected to rise 8 percent in 2012, while international expenditures grew 20 percent last year and are slated to grow 11 percent in 2012. After a surge in North American activity driven by a rush into shale plays, the availability constraints with regard to rigs and equipment is slowing continued expansion, the survey explains.

The survey’s results are underscored by strong oil prices, and Barclays notes that actual spending could be higher than forecast, since energy companies based their CAPEX budgets on relatively conservative oil prices and ongoing concerns about the world’s economic health. The companies surveyed reported their spending assumptions used an average West Texas Intermediate crude oil price of $87 a barrel and an average Brent price of $98/bbl.

If strong oil prices are sustained throughout 2012, there could be considerable upside to spending forecasts, with about 60 percent of survey respondents indicating their companies would increase CAPEX if the average WTI price rose above $100/bbl. On the other hand, more than two-thirds said they would cut spending should the average WTI price fall below $70/bbl.

Faster federal approval of drilling permits in the Gulf of Mexico also would increase U.S. spending levels, the survey notes.

The largest oil and gas companies are expected to spend the most, with ExxonMobil topping the list by expanding its 2012 exploration and production budget by 5 percent, to more than $30 billion. PetroChina Co. Ltd. is expected to be the second largest spender with expenditures approaching $30 billion, Barclays reports.

In terms of regional spending outside the United States, the areas with the most meaningful growth are expected to be Latin America, Africa, Europe, the Middle East and Russia, according the Barclays survey. Upstream capital expenditures are forecast to rise 21 percent in Latin America, 14 percent in Africa, and 42 percent in the former Soviet Union and Eastern European countries.

Among Latin American companies that will boost expenditures significantly, Barclays Capital says both Pemex and Petrobras continue to expand offshore drilling, while African spending is projected to rise as civil unrest and political disruptions in North Africa and other areas abate, and as work gets under way on large projects and in East and West Africa.

As a result of the ramped-up global spending on exploration, drilling and production, Barclays Capital suggests oil field service, equipment and drilling companies are positioned to outperform the broader equity market during the next few years.

Attracting More Capital

Shale drilling in North America will continue to attract more capital and provide incentives for merger and acquisition activity in 2012, according to a survey of 100 chief financial officers at U.S. oil and gas companies conducted by BDO USA LLP.

The fourth annual Energy Outlook Survey of CFOs found that as oil production finds new life in the lower-48, U.S. energy companies increasingly are making unconventional resources a part of their production strategies. Compared with BDO’s 2011 survey, 79 percent more 2012 respondents cited the discovery of significant new resource plays as the most important factor driving overall industry growth.

As oil and gas companies undertake their 2012 exploration and drilling programs, CFOs are increasing their companies’ investments in unconventional play areas, including shale plays (40 percent), followed by more environmentally friendly exploration and processing technologies (27 percent), and offshore exploration outside of U.S. waters (7 percent), according to the survey.

“We are in the midst of a significant global shift as unconventional energy sources become more attractive to oil and gas companies,” says Rocky Horvath, partner in the natural resources industry group at BDO USA. “These companies no longer view unconventional (plays) as expensive and time consuming, but rather as dependable and sustainable sources of revenue. I expect we will continue to see interest and investment in unconventionals as the United States takes center stage in this transformation.”

When it comes to increasing value for their companies’ shareholders, 29 percent of the CFOs surveyed cite unconventional resources as the strategy they are most likely to pursue, followed closely by cost-reduction programs (27 percent), and mergers and acquisitions (24 percent). In addition, BDO’s survey finds that more than 70 percent of CFOs expect global demand for natural gas to increase in 2012.

Noting that business development strategies also must account for environmental ramifications and legislation as oil and gas companies aggressively seek new resources, BDO says that among the respondents that experienced delay or termination of oil and gas exploration or processing projects in 2011, 56 percent pointed to federal or state environmental regulations as the cause.

Seeking to identify barriers to industry growth, the survey asked CFOs to identify the one environmental concern expected to most impact their businesses in 2012. Opposition to hydraulic fracturing ranked at the top of the list by 45 percent of the respondents. Other environmental concerns included spills and pollution cleanup (26 percent), and greenhouse gas emissions (19 percent).

Oil and gas prices continue to be the most important factor for growth in the industry, cited by 32 percent of the CFOs surveyed. Discovering new oil and gas resources was deemed the second most important factor (25 percent), followed by new technologies (16 percent), oil and gas demand (12 percent), access to capital or credit (7 percent), and mergers and acquisitions (4 percent).

In terms of the M&A market, the vast majority of respondents say they expect merger and acquisition activity to remain robust this year as unconventional production creates new opportunities for U.S. oil and gas companies, including smaller industry players. Fifty-two percent of the CFOs surveyed say they expect M&A activity to increase this year compared with 2011, while 46 percent think activity will stay about the same.

About four in 10 of the respondents identify improved revenue and profitability as the primary driver for M&A deals. Other catalysts include undervalued oil and gas assets (24 percent), a desire to increase market share (16 percent), geographic coverage (13 percent), and the push to become a fully-integrated oil and gas company (7 percent).

International Offshore Activity

Turning to international offshore activity, an outlook report from EOC Ltd. calls for increased exploration, drilling and production spending in 2012. Releasing the outlook as part of its quarterly financial statement, the Singapore-headquartered company says it anticipates global upstream spending to rise 13 percent, to $580 billion-$590 billion this year, based on a $90/bbl oil price, with total spending to reach a peak of $640 billion-$770 billion if oil prices average between $100-120/bbl.

Underpinned by crude oil prices, EOC says demand for global offshore production and construction services should remain strong this year, creating “a stream of contract opportunities for providing floating production, storage and offloading systems, and associated operations and maintenance services, as well as offshore construction services.”

Looking back at 2011, EOC notes oil prices remained consistently above oil and gas companies’ average budget planning price of $80/bbl, providing the impetus for companies to proceed with a number of new and deferred final investment decisions (FIDs) for various field development projects. Spending based on FIDs made last year will bolster contract opportunities for offshore production facilities and construction services in 2012, the firm reasons.

Global demand for offshore construction services is expected to increase with the pace of new field developments, and the installation of production systems and the associated requirements for regular field maintenance regimes. “Like the FPSO segment, heavy-lift pipe-lay vessels and accommodation work barges also will benefit greatly from the increase in spending attributable to higher oil prices,” the report states.

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