Look for major oil companies and independent producers to curtail capital spending this year in response to depressed oil and gas prices. Prospects are good-to-excellent that many will hoard cash for acquisitions instead. Salomon Smith Barney predicted a 20% reduction in North American exploration and production outlays this year when expecting gas prices to average $2.25 per thousand cubic feet (Mcf). But Geoff Kieburtz and Mark Urness, who lead the investment-banking firm's oilfield-service research group in New York, have reduced their forecast for international E&P spending growth from 10% to zero. ChevronTexaco Corp. chairman David J. O'Reilly says the company's 2002 capex budget is roughly equal to Chevron and Texaco's separate 2001 spending. The two companies were among the few majors and large independents to reduce outlays this past quarter. BP Plc had the biggest year-to-year drop. Spending for 19 other majors and independents climbed 19.6% year-to-year in the third quarter and 35.9% in the first nine months of 2001. Several companies stuck to their original budgets, including ExxonMobil Corp. Others' higher third-quarter and nine-month outlays reflected the impact of acquisitions. But there also was a clear drop in year-to-year growth from the first half in many instances as producers adjusted their output in response to falling prices. Anadarko Petroleum Corp. has lowered the pace of its U.S. gas-development drilling and shifted some of its capital to more high-potential exploratory drilling and oil-prone projects. "Now is not the time to grow gas production just for the sake of growth," says chairman Bob Allison. "We expect the increased emphasis on exploration to pay off longer-term with additional reserves and higher production." With commodity prices expected to stay weak through mid-2002 at least, producers are likely to concentrate their reduced expenditures on longer-term projects. They also will keep money available outside their budgets to acquire assets and, in some cases, competitors. Companies traditionally have turned from the drillbit to Wall Street to increase their reserves when prices have dropped in response to softened demand. There's no reason to expect them to behave any differently now, particularly since so many have begun to show the kind of balance-sheet discipline that capital markets demand. -Nick Snow

Comments