Higher service and equipment costs have forced companies to overspend their original E&P capex plans, with worldwide expenditures expected to increase 22% in 2006, according to Citigroup's midyear spending survey. The forecasted figure is the strongest growth in capex plans in the E&P industry since 2001. The 211 companies surveyed are planning combined worldwide expenditures totaling $253 billion. Producers also show an increased sensitivity to gas prices and decreased sensitivity to oil prices, plan capex increases next year too, and overall capex growth plans are held by both large and small operators. "The results of our survey confirm our expectation that the pattern of overspending on initial plans continues and that growth has become more balanced across major regions," says Geoff Kieburtz, oil-service analyst with Citigroup. "Fears that a combination of rising costs and lower natural gas prices will dampen North American activity appear to be premature, but are not unwarranted if trends persist. We believe the E&P spending cycle is moving into the mid-stage with several more years of robust growth ahead and positive implications for oilfield services and equipment stocks." The 2006 spending-growth estimate of 22% is a revision of Citigroup's original growth forecast of 14.1% that was published in December, based on producers' plans for 2006 at that time. The survey indicates the increased cost of services and equipment is the most common reason for the higher expenditure plans. Companies with budgets of more than $2 billion each plan an increase of almost 20%, while smaller operators are planning a 29% increase in spending. "This greater balance reflects a broadening of the investment-growth trend to include the larger integrated and national oil companies with a longer time horizon," Kieburtz says. Though the 211 survey participants' plans are based on a significant discount to the rising oil and gas futures strip, he adds. Gas prices would have to fall bellow $5.50 per thousand cubic feet to trigger a reduction in North American activity, the average participant reported. Capex deployment could be limited by personnel and funding constraints, the participants added. "The persistence of funding limitations is a reflection of the large number of small companies included in our survey," Kieburtz says. "What is more surprising is that personnel constraints appear to be even more severe outside North America than in the U.S., based on the mix of survey responses. We can only speculate that political instability in some major operating regions is beginning to exacerbate the tight labor market that exists throughout the industry."

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