Cowen Study: Exploration & Production Spending Surges Overseas, Slips in North America

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--North American oil & gas exploration & production (E&P) companies are expected to slice about $5 billion off their full-year 2013 capital spending, the result of low natural gas prices, greater spending discipline, increased drilling efficiencies, and a reduced need to hold acreage by drilling, according to a report earlier this year from James Crandell, managing director at Cowen and Company (New York, New York), a unit of Cowen Group (NASDAQ:COWN) (New York, New York).

But the slowdown in North American E&P spending this year is expected to be more than offset by sharply increasing capital spending overseas, Crandell projected: He sees non-North American spending rising by about 9.5%, or $39 billion, to $443 billion in 2013. By contrast, late last year he projected overseas E&P spending for 2013 would total $405 billion.

On a global basis, oil & gas companies are expected to increase their E&P spending by about $33.2 billion this year, to an estimated $636.6 billion. In Crandell's late 2012 forecast of 2013 E&P spending, firms were projected to spend about $603.3 billion this year. Higher crude-oil prices and strong global demand are the main reasons for the continued increase in global E&P capital budgets.

Crandell surveyed 166 E&P companies about their overseas spending plans for 2013. His forecast of higher spending outside North America is driven by stronger-than-expected growth in the Middle East, Europe, Asia/Pacific and Russia. His most recent survey, released this summer, shows a 9% increase in capital spending compared to his late-2012 survey.

Upbeat prospects for overseas E&P activity more than offset this year's projected $5 billion decline in E&P spending in North America. U.S. companies have trimmed their 2013 budgets by $4 billion, while Canadian producers have lowered their full-year spending by about $1 billion when compared to Crandell's late-2012 forecast of 2013 capital activity. In preparing his report, Crandell surveyed 245 U.S. companies and 118 Canadian companies.

Among U.S. E&P firms, Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) is expected to slash full-year 2013 spending by $2.75 billion to about $6 billion. Less-dramatic cutbacks were seen at Occidental Petroleum Corporation (NYSE:OXY) (Los Angeles, California), which plans an $888 million cut to $4.4 billion, and Hess Corporation (NYSE:HES) (New York, New York), which plans to lower U.S. spending by $800 million this year to about $3.8 billion. Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma), EOG Resources Incorporated (NYSE:EOG) (Houston, Texas) and Noble Energy Incorporated (NYSE:NBL) (Oklahoma City, Oklahoma) each plan to cut several hundred million dollars off their 2013 U.S. E&P budgets.

But not all U.S. E&P firms are cutting this year's capital budget: Continental Resources (NYSE:CLR) (Oklahoma City, Oklahoma) is slated to increase spending by $500 million to $3.6 billion. ConocoPhillips (NYSE:COP) (Houston, Texas) expects to boost spending by $233 million this year. Apache Petroleum Corporation (APA) (Houston, Texas), plans a $99 million increase to $5.25 billion.

At the time of Crandell's summer forecast, Encana Corporation (NYSE:ECA) (Calgary, Alberta) planned to increase 2013 spending by about $400 million to $2.2 billion. Encana recently announced a series of changes, including staff cutbacks, and said it was focusing its capital investment in North America on five oil and liquids-rich plays. The company also announced it was divesting of some acreage. It estimated its 2014 capital budget at $2.5 billion.

In the U.S., Crandell said, E&P capital budgets were being driven by low natural gas processing, improved drilling efficiencies, and a reduced need to hold acreage by drilling. "The outlook for both Canada and the U.S. has eroded somewhat," Crandell said. "While overall spending is down, we believe well completions and footage drilled will increase due to improvements in drilling efficiency." Efficiency gains, such as multi-pad drilling, are enabling companies to produce more oil and gas from a smaller drilling footprint.

"Other companies have highlighted a renewed desire to live within cash flows, and this has led to a tightening of budgets this year," Crandell continued. In recent years, some companies have paid high prices to acquire acreage in areas thought to have significant oil & gas production potential, such as the Utica and Haynesville shales. So far, those areas have not lived up to their potential, particularly if they contain a high portion of dry gas. For more on that issue, see June 6, 2013, article - Oil & Gas Production from Utica Shale Falls Short of Expectations, and July 16, 2013, article - After the Land Rush: Exco Doubles Down on Haynesville Shale.

Given current dry gas and natural gas liquids (NGL) prices in the U.S., Crandell sees dim prospects for gas-focused companies going forward: "Dry gas drilling should continue to be impacted by low natural gas prices, while wet gas drilling should be negatively impacted by lower NGL prices," he commented. On a cash basis, natural gas currently is selling for about $3.60 per million British thermal units (MMBtu), and gas futures remain under $4 per MMBtu for all of 2014.

"Improved drilling efficiencies means we are getting more oil & gas from fewer rigs, which is good news for consumers and producers," said Jesus Davis, Industrial Info's vice president of research for the Production, Pipelines and Terminals industries. "But the industry's rationalization is continuing, as producers are forced to make decisions based not on future production or potential prices, but the market realities of here and now. In today's environment, low-cost producers will do well, and those with premium, oil-dominant acreage and advanced expertise in hydraulic fracturing are expected to do especially well."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.