The world's oil and gas producers are increasing their 2001 capital budgets beyond the healthy gains they established in December 2000, a survey of 350 producers indicates. The group's planned total outlays for the year will be 23% higher than in 2000, up from its original 19% increase, Lehman Brothers Inc. found in a midyear update of its E&P spending survey. This would follow an actual 14.9% year-to-year increase in the group's expenditures from 1999, the firm adds. Producers are increasing projected outlays because of higher drilling dayrates and oilfield-service costs, and increased cash flow from continued strong commodity prices, maintains James D. Crandell, who covers oil services and drilling for Lehman Brothers in New York. "Rig rates, particularly for land rigs in the United States and jackups in the Gulf of Mexico, have risen more rapidly than companies estimated when putting together their E&P budgets," he says. "Thus, it is costing more money to drill the same number of wells in the original program." At the same time, both oil and gas average prices apparently will be higher this year than companies originally assumed, he adds. Prices for West Texas Intermediate now are expected to average $2 per barrel more in 2001 than the $25.25 average that producers had forecast late last year. At the same time, producers had expected 2001 gas prices to average $3.75 per thousand cubic feet (Mcf), compared with Lehman Brothers' $5-per-Mcf forecast. "These higher-than-expected oil and gas prices are, in most cases, producing higher-than-budgeted cash flow," says Crandell. "In many cases, this higher cash flow is being earmarked for more drilling." The 350 producers now base their 2001 spending plans on an average WTI price of about $26 per barrel and an average gas price of $4.40 per Mcf at the wellhead. The latest survey forecasts that international E&P expenditures will rise an impressive 24% from spending in 2000, up from 19% in Lehman Brothers' December 2000 survey. Driving the increase are budgets that are up from 2000 by 40% for Royal Dutch/Shell (NYSE: RD), 38% for Exxon Mobil Corp. (NYSE: XOM), 35% for Enterprise Oil Plc (NYSE: ENT), 34% for India's Oil and Natural Gas Corp. Ltd., 31% for Chevron Corp. (NYSE: CHV) and 18% each for BP (NYSE: BP) and Repsol YPF (NYSE: REP). Crandell suggests the international upstream recovery is just beginning to blossom, compared with the North American, gas-driven rebound that is about 21 months old. "While it differs by region, we believe that the [overseas] recovery is only six months old and just now beginning to accelerate," he says. "The 24% international gain indicated in our survey is strong evidence of that, as is rising international rig activity and considerable anecdotal evidence of companies tendering for rigs." Noting that majors and national oil companies primarily drive international E&P, Crandell continues, "Once the spending ship gets turned around, it is not likely to reverse soon. Thus, we see international spending beginning to lead the way later this year and continuing into 2002 and 2003." Lehman Brothers now estimates U.S. E&P outlays will rise about 18% this year, roughly in line with the 19.1% that it forecast at the end of 2000, following last year's actual 24.3% gain from 1999. A greater improvement among independent producers (an estimated 29% now compared with 21.7% in December 2000) roughly offset less of a gain among the majors (6% now versus 15.9% at the end of last year). Among independent producers, Crandell forecast gains during 2001 of 107% from Pioneer Natural Resources Co. (NYSE: PXD), 76% for Chesapeake Energy Corp. (NYSE: CHK), 59% for Spinnaker Exploration Co. (Nasdaq: SKE), 45% for Anadarko Petroleum Corp. (NYSE: APC), 42% for Mitchell Energy & Development Corp. (NYSE: MND), 32% for Kerr-McGee Corp. (NYSE: KMG), 29% for Unocal Corp. (NYSE: UCL) and 22% for EOG Resources Co. (NYSE: EOG). By contrast, majors' 2001 U.S. E&P budgets currently range from a year-to-year increase of only 8% for Shell to decreases of 5% for Chevron and 17% for Texaco Inc. (NYSE: TX). "We are not backing away from gas-oriented names-far from it," Crandell says. "We continue to recommend a large number of North American gas-oriented companies. What we are advocating is a further tilt toward the internationally oriented [drilling and oilfield-service] stocks which have the most exposure to the accelerating growth we project outside North America." Among the service companies, he emphasized Halliburton Co. (NYSE: HAL) and Weatherford International Inc. (NYSE: WFT), both of which normally receive more than half of their oilfield revenues outside North America. Crandell considers Transocean Sedco Forex Inc. (NYSE: RIG) an offshore drilling contractor that is very well-positioned to benefit from the international and deepwater drilling upturn, while Global Marine Inc. (NYSE: GLM) and Ensco International Inc. (NYSE: ESV) are his top picks among jackup-oriented drillers. -Nick Snow
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