Firms responding to soaring prices by cautiously increasing budgets for exploration and development
The Globe & Mail, Tuesday, August 15
LILY NGUYEN, Alberta Bureau
Calgary -- Canada's energy producers, flush with cash and lean from shedding debt, are cautiously opening the taps on spending for exploration and development.
After slashing capital budgets in 1999 in response to bottom-of-the-barrel crude prices, the energy sector is responding to this year's soaring oil and gas prices by again increasing spending.
"They're doing it in a prudent way. This is not throwing around money," said Martin Molyneaux, research director at FirstEnergy Capital Corp.
The latest in the list of capital spending increases comes from Talisman Energy Inc., which said yesterday that it will increase its current Canadian exploration and development program by $118-million to $641-million, an increase of 23 per cent. That brings their total capital spending plans to $1.6-billion in 2000.
Talisman said it will increase its exploration budget to $222-million from $170-million, and its development program to $419-million from $353-million, directing the spending at oil projects in Chauvin, Alta., Carlyle, Sask., and Ontario.
Last week, Anderson Exploration Ltd., reporting on a third quarter that saw cash flow increase 128 per cent to $219-million from the same period a year earlier, said oil and gas capital spending has jumped to $494-million this year from $201-million last year. That's a 146-per-cent increase, which the company said was financed entirely by cash.
And in July, Alberta Energy Co. Ltd. said it increased its capital program $400-million to $1.7-billion.
During the same month, PanCanadian Petroleum Ltd. said it would increase its capital spending by 40 per cent to $1.3-billion after a second quarter that saw cash flow double to $514-million.
The energy sector is benefiting from oil prices reaching $30 (U.S.) a barrel, and natural gas prices in the range of $4.50 (Canadian) for 1,000 cubic feet.
When companies drew up their budgets last fall, they had predicted oil prices in the $18-to-$20 (U.S.) range and gas at about $2.50 to $2.70 (Canadian) for 1,000 cubic feet, Mr. Molyneaux said.
Terry Peters, an analyst with Griffiths McBurney & Partners in Toronto, said since then, producers have seen "creeping capital budgets" as they find themselves with excess cash. He added that many companies have ramped up capital spending without formally announcing it.
"A lot of companies will just spend more and they'll report it to shareholders come the end of the third quarter that their spending is up because the opportunity is there," he said.
Mr. Molyneaux predicted that Crestar Energy Inc., Gulf Canada Resources Ltd. and Canadian Occidental Petroleum Ltd. could soon be added to the list.
Despite capital spending increases that look spectacular on the surface, Mr. Molyneaux said they will be dwarfed by the jump in cash flow.
The sector hasn't forgotten the fiasco of recent years, when capital spending gushed from optimistic producers, who were then hard hit when oil prices tumbled in 1998, falling to $10 (U.S.) to $12 a barrel last year.
"All these people have a long memory," Mr. Molyneaux said.
He said companies have been paying down debt for two quarters. Only with more comfortable debt levels is the attention turning to capital spending programs.
Capital spending increases haven't raised any alarm bells at Dominion Bond Rating Service Ltd. "The cash flows have been coming in so strong that there's not much of a concern to us yet," DBRS analyst Michael Reo said.
He cautioned that oil prices could turn on a dime, as in the past, but said the outlook currently is better than in 1998 since both oil and gas have moved higher in tandem. "I guess you could say it's been the best of both worlds for the last two months," he said, adding that if oil prices tumble, gas could cushion the fall.
Mr. Peters, of Griffiths McBurney & Partners, predicted that capital spending would continue to increase into the next year, with 2001 expenditures even outpacing 2000 levels.
"It seems to me for a number of these companies, their cash flow will stay at pretty high levels," he said, adding that many will sit on cash this year rather than spend it. "It looks like next year could be as good as this year."
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