?Oil and gas producing companies worldwide whittled 2009 E&P budgets as they watched oil prices and gas prices tumble by more than 50%.

View Barclay's Report On U.S. E&P Company Capex.


In the U.S., the price of West Texas Intermediate light sweet crude fell from $145.31 a barrel in early July 2008 to $41.70 by late December. Similarly, wellhead gas prices fell from an average $10.82 per million Btu in June 2008 to $5.33 in late December, according to the U.S. Energy Information Administration. The declines triggered cutbacks in drilling rig operations in more expensive plays, such as the popular gas shales, late in the year.


The prospects for a continued weak world economy and price declines persuaded worldwide state and private operators to lower their spending plans for 2009 by 12%, from US$453.5 billion in 2008 to $400.2 billion in 2009, according to the “Original E&P Spending Survey.” The survey has been compiled annually, since 1982, by James D. Crandell and James C. West, senior E&P analysts with Barclays Capital, which recently purchased the Lehman Brothers investment-banking practice.


Breaking down those numbers, 245 U.S. operators have cut 2009 spending plans 26% from $106.3 billion in 2008 to $78.6 billion. Budget plans for 85 operators in Canada have fallen 23% from $28.7 billion in 2008 to some $22 billion.


Internationally, the 100 operators surveyed were less apprehensive about the price and economic declines as they planned to lower spending by only 6%, from $318.6 billion in 2008 to $299.6 billion in 2009. Those cuts marked the end of a six-year streak of increased spending.


The analysts report that real cutbacks for 2009 could go deeper. When the surveyors gathered their information, operators based their plans on $58 oil and $6.35 gas. With prices even lower since the early-December survey, more plays and prospects will fall off the list of economically acceptable projects.


Crandell and West asked E&P chiefs what prices would cause them to re-evaluate their budgets. The average answer was $50 oil and $5 gas.


Price isn’t the only factor influencing the spending plans. The analysts say 30% of the surveyed companies reported credit markets affected their 2008 capex and 42% believe credit markets will affect 2009 spending.


The pessimistic outlook is a long jump from the optimism that dominated the industry when Crandell and West surveyed the group at midyear 2008. At that time, operators based their spending plans on $85 oil and $8 gas.


Not only that, but companies piled more spending on top of their 2008 plans. They told the analysts in December 2007 that they planned to increase spending 11% in 2008. By midyear, plans grew to a 20% increase, and a December 208 review of actual numbers reveals 22% inflation in real spending.


The outlook isn’t all gloomy, the analysts report. “We anticipate that North American E&P expenditures will rebound in 2010, driven by production declines and a rebound in demand.


“International E&P expenditures are anticipated to be flat to moderately up in 2010 as recovery in oil demand begins and non-OPEC production turns downward. At current valuations, we have a positive stance on the oil-service and drilling group with an emphasis on those stocks with international and deepwater exposure and lower evaluations.” (For more on their service-stock outlook, see “Top Service Stocks, 2009” in this issue.)


Even in the U.S. where planned spending dropped the most, 32 companies (13%) said they would increase spending in 2009.


U.S. companies involved in shale plays plan some of the largest spending declines in 2009. Among these are Chesapeake Energy Corp. (-51%), Devon Energy Corp. (-44%), EOG Resources Inc. (-34%), Hess Corp. (-62%), ConocoPhillips (-23%) and Anadarko Petroleum Corp. (-32%). Each will drop its 2009 budget by $1 billion or more from the 2008 level.


Cuts among operators working in Canada include Husky Energy Inc. (-47%), Devon Energy (71%), Talisman Energy Inc. (-47%), Canadian Natural Resources (-23%), EOG Resources (-50%), Nexen Inc. (-47%), Murphy Oil Corp. (-25%) and Crew Energy Inc. (-56%).


Long-term planning and deep pockets clearly play a big part in plans for E&P spending. In spite of worldwide price declines, ExxonMobil Corp. plans to raise its worldwide spending 3%. Among the other supermajors, Chevron Corp. will hold its spending at the 2008 level, and BP Plc will shrink its budget 4%; Total SA, 5%; and Royal Dutch.

?Overall, the six supermajors will pull back by 2%, from $69.46 billion in 2008 to $68.27 billion in 2009

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Outside North America, Russian companies showed the largest budget shrinkage; planned spending will fall 22% from $33.88 billion in 2008 to $26.38 billion in 2009. Privately owned Lukoil, with a 50% cutback, forecasts the largest decline. State-owned Gazprom plans a 2% overallspending increase.

?In Latin America, oil-dominant PDVSA plans the sharpest retreat—15%—while gas-dominant Petrotrin in Trinidad & Tobago anticipates a 27% increase.


European operators plan an aggregate 11% drop in spending, followed by Middle East and African operators with a 2% dip and Asian operators with a 1% trim.


Focus on specific markets shows clearly in some cases as companies adjust to economic opportunity. For example, while Anadarko will lower its U.S. spending 32%, it will increase international spending 39%.
Crandell and West also asked producers to reflect more specifically on their operations. As in past years, they asked about key determinants of spending. In most years since 2000, the top determinant has been gas prices, perhaps reflecting the U.S. focus on gas. In 2000, cash flow was the No. 1 factor. In 2003, prospect availability shared the top spot with gas prices and, in 2005, drilling costs ranked at the top of the list.


In 2008, 30% of producers with offshore operations planned increased spending, while 20% planned spending decreases. In 2009, only 20% anticipated higher spending and 35% expected reductions.


The technology that producers report as most key to their operations for most years since 2000 has been 3-D and 4-D seismic; in 2007 and 2009, however, the top technology was fracturing and stimulation, another reflection of the strong push to develop shales, tight sands and coalbed methane in the U.S. and Canada.


The Barclays analysts also asked operators about the attractiveness of drilling for reserves, compared with buying reserves. Drilling won out in all cases, but the gap is narrowing. In the U.S., the drilling preference fell from 83% in 2008 to a forecasted 72% in 2009. In Canada, it dropped from 66% to 52%; outside North America, from 86% to 67%.


On the other hand, 49% of the E&P spending decision-makers say they are actively trying to acquire reserves.


In spite of the sharp cutbacks in the U.S., operators still like the economics. Among U.S. producers in the December 2008 survey, 58% felt exploration economics were good or excellent, compared with 37% in Canada and 55% outside North America. Those numbers are similar to the December 2007 responses, but only the Canadian companies’ outlooks increased in the “excellent” category.


Crandell and West note significant opportunities for investment in oil and gas service companies. The eight major services companies currently trade at approximately 6.9 times estimated 2009 earnings per share, compared with an average multiple of 20 during the past five years and 32 during the past 10 years.


Similarly, the 11 drilling contractors tracked by the analysts currently trade at about 3.3 times 2009 EBITDA (earnings before income, taxes, depreciation and amortization).


After the sharp declines in prices for both service-company and operating-company shares, Crandell and West suggest this might be a good time to invest in future growth.

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