E&P Spending Expected to Increase 12% in 2011

Fueled in large part by strong oil prices, capital spending on E&P by 139 publicly traded oil and gas companies studied is expected to increase by approximately 12% to $406 billion in 2011, building on gains of 19% in 2010, according to a report from IHS.

"Although this modest increase is less than the 19% rise in 2010, oil and gas companies, many of which decreased spending considerably during the economic downturn of two years ago, are continuing to increase their investments in their upstream portfolios, particularly for oil-weighted projects," said Aliza Fan Dutt, senior analyst at IHS, and author of the "IHS Herold Global E&P CAPEX Review." "Despite recent volatility and a wobbly economic recovery, oil prices remain relatively strong, which supports higher upstream spending. In addition, investments in oil and unconventionals continue at a rapid clip, while conventional gas outlays remain relatively depressed."

The shift to drilling on oil and liquids-rich properties that began in 2010 accelerated through the year and continues today, said the report. According to Fan Dutt, "those companies that shifted their portfolios earlier will benefit more than those that moved more slowly."

EOG Resources, for example, an established natural gas producer, shifted to the oil side much earlier than most of its peers. As a result, oil now contributes 60% of EOG Resources' revenues and the company is posting strong earnings growth.

"Cost inflation will continue to be a key issue, with more companies competing for oil services and equipment during a time of elevated oil prices," said Fan Dutt. "Cost containment will be particularly important for natural gas-weighted producers as they struggle to achieve strong margins amid weak natural gas prices."

Company peer groups classed in the report include large USs E&Ps, largest North American E&Ps, global integrated oils, Canadian E&Ps & Trusts, Canadian integrated oils, outside North America integrated oils; small-sized US E&Ps, US integrated oils; mid-sized US E&Ps, outside North America E&Ps, US E&P MLPs and US pipelines, and power & diversified.

"US E&P master limited partnerships (MLPs)," which are riding strong cash flows from a predominantly crude oil base, will increase spending by 43% in 2011. This is on top of the category's 83% increase in 2010. "US pipelines, power and diversified"-classified companies should boost upstream spending by 49%, which is largely tied to infrastructure investments needed to support the tremendous influx of gas production in the US. Companies in the "outside North America E&Ps" peer group will boost spending nearly 35%, with a focus on emerging markets.

"A healthier economy will back attractive upstream opportunities overseas," said Fan Dutt, "many of which are in areas that are riskier both politically and geologically. For example, companies like CNOOC (China National Offshore Oil Corp.) do not plan to slow down their upstream expansion to fuel growing Chinese demand."

"Mid-sized US E&Ps" will see a healthy 25% increase in spending, while the "US integrated oils" are expected to reduce the rate of increase to 14% this year. Marathon Oil is the most aggressive, ramping up spending by 37% as it drills on expanded US acreage in the Anadarko Woodford play, the Niobrara play in the Denver-Julesburg basin in Colorado and Wyoming, and in its Bakken shale position.

On the other hand, the "largest North American E&Ps" will increase capital outlays by only 3%, which will be buttressed by spending on unconventional resources in shale basins, noted the report. For example, Pioneer is increasing its spending by 53%, with its expansive holdings in the Spraberry field and Eagle Ford shale play, where it was an early entrant.

The "global integrated oils" will continue their massive investments in oil and gas projects around the world with a muted 9% spending increase, down slightly from last year. Companies in the "Canadian integrated oils" category are slightly more eager to spend with a planned increase of 13%. Husky Energy leads the pack with a 44% increase on operations primarily in Western Canada and offshore Canada's east coast.

Spending among the "outside North America integrated oils" peer group, many of which are in the earlier stages of tapping their vast amounts of crude resources, also is expected to rise by 13% this year, the same rate of growth as last year. This increase is due to strong spending in Latin America and Russia.

Ecopetrol, the state-owned oil company of Colombia, expects to spend a whopping 56% more this year, on top of a 34% increase last year (see the related IHS report, "Opportunities in Colombia's Extensive Heavy Oil Play Continue to Grow"). Latin American behemoth Petrobras continues to invest heavily on its expansive upstream portfolio, with an expected 24% increase in spending. Lukoil is slated to spend 55% more this year.

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