To All:
This appeared in TheStreet.com earlier today and makes for interesting reading for those
interested in oil services companies and drillers who will benefit from an increase in
E&P.
Top Stories: E&P Overview: Capital Spending Gains Could Boost Group
By Mavis Scanlon
Staff Reporter
11/18/97 1:34 PM ET
The oil drilling and oilfield service sectors have been two of Wall Street's darlings this
year, no doubt about it. Yet the companies that have been handing work to the drillers for
the past two years, the exploration and production companies, have underperformed the
market by a wide margin.
The outlook for E&P companies may be improving, however. "There's certainly more
value there than generally thought," says Audrey Jones, part of a Deutsche Morgan
Grenfell team that manages $535 million in assets. "Because of the need to find oil and
gas, the companies that have that ability should be recognized."
Investors certainly have not had confidence this year. Since Jan. 1 the S&P 500 is up
23% for the year and the E&P industry is down 2%, according to data tracker Baseline.
Compare that to the oil and gas drilling and equipment sector, which has been on a roll.
Even with a couple of recent heart-stopping skids, that group is up 68% for the year.
Historically, the earnings of exploration and production companies have been tied to the
price of the commodity being sought -- crude oil or natural gas. "If you're looking at a
project, the price of the commodity will depend on whether you take the next step or
not," explains Jeanne Mockard, a Putnam senior vice president and manager of the firm's
$400 million Global Natural Resource fund. If there is a
major drop in the price of oil, say to $14 a barrel in a worst-case scenario from the
current $20 range, says Mockard, the E&P companies would feel it before the drillers.
The drilling and service companies are on contract, and will be paid something even if a
project is canceled. Right now, gas prices are at 10-year-high levels, and people
are jittery, feeling that these levels can't be sustained. For
instance, if El Nino delivers a warm winter, demand for gas
could drop substantially. A cold winter would provide a boost.
Exploration and production companies build assets by locating crude oil and natural gas
deposits. But the trick for an E&P company is then getting that stuff out of the ground.
In a sense, the only way E&P companies make money is by depleting their assets. And a
good E&P company will always be working to find new reserves, thereby replacing its
assets, Deutsche Morgan Grenfell's Jones said.
Therefore E&Ps need strong cash flow.
And the cash seems to be finally flowing again. Capital spending for getting oil out of
reserves and to market has steadily increased since 1995, according to a Salomon
Brothers report. In its midyear update to an annual survey of worldwide E&P
expenditures, Salomon estimates that the increases seen this year are the largest the
industry has seen since 1981. The average 19.9% increase follows a 15.2% increase in
1996 and a 9% increase in 1995. And the majority of the 211 major and independent oil
and gas companies that Salomon surveyed said they plan another spending boost in 1998.
Spending increases have been fueled not only by the development of successful
exploratory programs, but also by faster investment in and development of new
properties. "Today's E&P companies are growing -- through the drill bit, by finding oil or
through acquisitions," Jones says.
Burlington to Boost Spending
One example is Burlington Resources (BR:NYSE), one of the larger independent
companies. The company recently completed a $3 billion merger with Louisiana Land &
Exploration and is planning several projects in the deeper tracts of the Gulf of Mexico.
Although the lead time is longer and development costs are higher than in shallow water
or onshore, the reserves are much larger. "In absolute dollars
on a per-barrel basis it's very attractive," says Alan Petrie,
the company's director of investor relations. Burlington will
continue to operate in the San Juan Basin in New Mexico,
and is planning other projects in North Dakota, West Texas
and Wyoming. Overseas the company has projects planned for Venezuela and
Argentina.
Burlington, which was trading down 5/8 at 46 5/8 on Tuesday, is planning to spend more
than $1 billion in exploration and development in 1998. This is up from less than $1 billion
in 1997, according to Petrie, and up sharply from the $432 million quoted in the Salomon
survey that the company spent on E&P in 1996. "And we still have a lot of fire left in the
balance sheet," Petrie adds. He hints that the
company will be looking to make additional strategic acquisitions.
Although the major oil companies still account for 90% of exploration spending in the
U.S., independent companies are gaining a stronger base, especially in the "lower 48,"
says Jon Rasmussen, an economist at the Department of Energy's Energy Information
Administration. Smaller companies have seized technological advances, such as 3-D
seismic imaging and horizontal drilling, and used them
for greater drilling success rates and more efficient extraction of oil and gas. The majors
have sold many domestic reserves and have gone international (as have many
independents as well) in search of larger fields that may yield greater reserves.
Apache Looks Overseas
Apache Corp. (APA:NYSE) is an example of an independent doing well overseas. An
oil and gas discovery offshore China in early October may be the company's largest find
ever. The company is finalizing 1998 expenditure plans, but, even on the low end, E&P
spending will increase 12% to $770 million from the 1997 preliminary total of $680
million. On the high end, the company might spend 25% more, or $850 million. Capital
expenditure estimates include costs for exploration and development and related costs,
which include production facilities and pipeline installation costs as well as the costs of
lease rentals and seismic surveys.
The company plans to concentrate the largest part of that increase in international
operations. It will be drilling its first well in Poland, for example, in the second quarter of
1998, according to John Kelso, Apache's manager of public and international affairs.
"Every year that's gone by we've broken another record as far as wells drilled," says
Kelso. Preliminary 1997 figures show 475 wells drilled in 1997, compared with 406 in
1996 and 248 in 1995, he said. "In general we feel very good about the business."
With good reason. Production from recent finds in Egypt has ramped up to about to
about 20,000 barrels per day from nothing just two years ago. Apache was trading
Tuesday at 37 13/16, down 1 7/16.
The race to find and develop new reserves of oil and gas to slake the world's thirst for
energy may actually be a good investment again. "This sector is going to be the next big
surprise," says Michael Smolinsky, vice president of First Albany's energy research
group. "The underlying fundamentals are much better than people perceive."
c 1997 TheStreet.com, All Rights Reserved. |
