By OGJ editors
HOUSTON, Feb. 16 -- Many oil and natural gas exploration and production companies are maintaining a more bullish 2004 outlook for oil and gas prices as well as a more aggressive view of their capital spending plans, according to a recent informal survey conducted by Raymond James & Associates Inc., St. Petersburg, Fla.
In a recent industry brief, Houston-based RJA analyst J. Marshall Adkins said, "Overall, the general attitude of most E&P companies was very positive with most expecting higher commodity prices and bigger capital spending increases than what have been publicly budgeted."
RJA earlier this month queried about 40 E&P and oil field service executives while they attended the North American Prospects Expo in Houston. Respondents relayed their expectations for oil and gas prices, capital spending plans, service costs, and merger and acquisition activity for 2004.
Oil, gas prices
The survey showed that those surveyed expected oil and gas prices to average 10-15% higher than Wall Street's expectations. According to RJA, the energy executives' estimates for natural gas prices for 2004 averaged $5.27/Mcf with a high guess of $6.35/Mcf and a low guess of $4.25/Mcf. "This is versus the current First Call consensus of only $4.28[/Mcf] and generally budgeted long-term price expectations of $4.50[/Mcf]," Adkins said. RJA's estimated gas price was $5.50/Mcf.
The average 2004 oil price estimate for the group was $30.89/bbl. Estimates ranged $28-35/bbl. The current First Call consensus was $26.83; generally budgeted long-term price expectations are $26/bbl. RJA's estimate was $30/bbl.
"Given the large disparity between what [Wall] Street thinks and what the industry insiders really think, current cash flow and spending forecasts are likely too conservative. Likewise, higher producer cash flows typically means stronger drilling activity and earnings for oil service companies," Adkins speculated.
Capital spending
With the relatively high price outlook and outstanding returns available, Adkins posed, "Why do capital spending expectations remain conservative?"
Adkins noted that if oil and gas prices remained above expectations, spending levels could be "meaningfully higher." Many E&P firms, in fact, were found to be "front-end loading their budgets with the expectation of increasing spending if energy prices hold up."
Adkins said, "For the more leveraged companies. . .capital spending will likely remain below cash flows in order to fund further debt reduction." He said that major oil companies likely would continue redirecting the largest portion of their cash flow outside of the US.
Service costs
It was the general consensus among the E&P company executives surveyed that service costs will only move up "modestly" in 2004. This rise was not expected to have any negative impact on drilling plans, RJA noted.
"We did however find some on the other side of the consensus view, those that thought there could be more meaningful price increases in the second half of the year," Adkins said. "In fact, we found that some of the smaller operators have already locked in service contracts for the next several months."
Some operators said that if costs were to rise as rapidly as they did in 2001, some projects would have to be reevaluated and potentially abandoned. "Some operators are more concerned about the quality of service as the system nears capacity. While most service companies don't expect a shortage of labor, the concerns are that the lack of experienced labor could reduce efficiencies," Adkins said.
M&A activity
Most respondents to RJA's survey expect more M&A activity in 2004 than in the previous year, due largely an increase in the amounts of cash generation by large E&P companies and their inability to grow organically, RJA said. "Others pointed to the fact that the majors, focusing on profitability, have continued to shed higher-cost, noncore assets and private companies are finding it difficult to refuse higher bid prices," Adkins said.
"Based on the public market trading value of some companies, we would not be surprised by an increase in corporate transactions," Adkins speculated. Also, he added, "One of the more interesting things we heard concerning the M&A market was the opinion that as much as 30% of Canadian properties changed hands last year."