Analyst claims oil companies will use higher cash flow to repay debt before hiking drilling budgets
Friday March 12, 6:16 pm Eastern Time
Wary oil executives not ready to boost spending yet
By Jeffrey Jones
CALGARY, March 12 (Reuters) - Higher oil prices driven by a new deal among major producing nations to
cut output added a bounce in Big Oil's step on Friday, but wary executives aren't ready to pump cash back
into their shrunken budgets just yet.
Stock prices of long-pressured North American oil companies extended their recent climb on Friday after key
members of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers agreed in
The Hague to cut more than two million barrels a day from swollen world crude markets in efforts to shore up
prices.
The deal, which comes ahead of an OPEC meeting later this month, led to an 18-cent rise in benchmark U.S. oil prices to $14.49 a barrel after earlier
shooting above $15. Oil is up about 30 percent in the past month.
Energy executives say they are enjoying the ride while it lasts. But after instituting painful, double-digit cuts to exploration and production spending and
axing thousands of workers across the continent over the past year, none are announcing plans to stray from their defensive positions yet.
Executives and analysts remain concerned about whether the producing nations will comply with their own cuts.
''I think (the oil price rise) is pre-OPEC meeting psychology,'' Jim Buckee, chief executive of Calgary-based Talisman Energy Inc. (Toronto:TLM.TO -
news), one of Canada's top international oil producers, told Reuters.
Talisman's shares on the New York Stock Exchange closed up 38 cents to $19.32 on Friday, representing a 31 percent increase from the beginning of the
month.
Buckee said his company, which cut its capital spending by 18 percent from last year, would revisit spending plans in June and maybe add cash if higher
oil prices look sustainable.
Elsewhere, the story was similar. Los Angeles-based Atlantic Richfield Co. (NYSE:ARC - news), the No. 7 U.S. oil company, plans no changes to
initiatives aimed at saving $500 million within two years, ARCO spokesman Dave Orman said.
ARCO, hit hard by 16 months of weak oil prices, sliced capital spending by 25 percent to $2.7 billion worldwide in 1999 and has laid off more than
2,000 workers.
''Do we plan to reduce our targets for cost-cutting? No,'' Orman said. ARCO closed up $1.125 to $61.25 on Friday, a 15 percent increase from the start
of the month.
Analysts' estimates have pegged the amount of cash drained this year from worldwide oil-company drilling budgets at more than $20 billion as energy
companies wrestle with oil prices that have hit 25-year lows, when adjusted for inflation. A recent Reuters survey placed job cuts announced by oil
companies since December at nearly 50,000.
In North America, the spending cut is borne out by drilling statistics. U.S. drilling company Baker Hughes Inc. (NYSE:BHI - news) reported on Friday
that 534 rigs were operating in the United States this week, down 44 percent from a year ago.
North of the border, 274 rigs were drilling in the main Canadian producing region, a drop of 47 percent, the Canadian Association of Oilwell Drilling
Contractors said this week.
Oil companies will have a difficult time boosting spending this year even if oil prices stick to current levels, said Bob Gillon, analyst with Stamford,
Conn.-based John S. Herold Inc.
That's because the industry is faced with high debt levels compared with falling cash flow and could try to repay as much as $10 billion to banks this
year, Gillon said.
''(Conditions ) might be a bit better than what we were thinking two or three weeks ago, but I think it's still going to be a very slow industry,'' he said.
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