E&P Cap Ex Survey Shows Spending up 25%

JOHN FREEMAN, Raymond James (03/29/2010)
We recently completed our year-end cap ex survey, which is comprised of 46 public independent E&P companies that supply roughly 1/3 of total U.S. gas and most of the supply growth. For 2010, the survey shows that companies, on average, are planning to spend 25% more y/y (still 23% down from 2008 levels, albeit in-line with 2007). When you combine technological advancement, hedging profiles, lease terms, improved balance sheets, and higher crude prices, it's easy to understand why companies aren't hesitating to put more money in the ground. Today's 'Stat of the Week' is a follow up from our production survey last week, which painted a pretty bearish picture for natural gas through the year, driven by the outlook for E&P spending. . .which is not slowing.

First, a recap from 2009:

1. Total cash flow (before changes in working capital) was $57.5 billion, nearly 30% lower than 2008—obviously due to the marked decline in commodity prices as production was actually up ~8% y/y.

2. In 2009, total spending was $59 billion, or 3% in excess of cash flow. In 2008, companies spent $83 billion, almost 50% in excess of cash flow! Spending during 2009 consisted of the following:
  • $51.5 billion for exploration and development (E&D), or 87% of total spending. This compares with 2008, when E&D comprised only 71% of spending.
  • $7.5 billion for property acquisitions or ~ 13% of total spending. In 2008, acquisitions comprised 26% of total spending.
  • $375 million for stock buyback, or less than 1% of spending. In 2008, this comprised about 4% of total spending.
2010 shows E&D budgets up 25% in 2010. Our coverage is set to spend ~$64 billion in 2010. As shown in the chart below, this is still well below spending in 2008, but on par with 2007 levels. In addition to E&D, companies continue to spend to add to their acreage positions, particularly in the relatively newer shale plays (i.e., Eagle Ford, Marcellus, Bakken). We've seen more and more companies divest conventional assets to fund spending for unconventional plays and expect this trend to continue.

E&D Budgets Going Up in 2010

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