Chevron (NYSE:CVX), a domestic titan of the energy patch, reported spectacular earnings last week that contained important clues about the future direction of capital spending for upstream exploration. The level of spending by Chevron and others will help determine the depth of the economic cycle. (Learn more in The Ups and Downs of Investing in Cyclical Stocks.)

Capital Spending
Chevron kept its overall capital spending for 2009 at $22.8 billion, which was flat with the company's 2008 budget. Drilling a little deeper, we discover the capital spending components.

Chevron Planned 2009 Capital Spending Components

Segment Amount (billions) Percent
U.S. Upstream $3.6 15.8%
International Upstream $13.9 61.0%
U.S. Downstream $2 8.8%
International Downstream $2.3 10%
Chemicals & Other $1 4.4%
Total $22.8 100%

The company stated that a one-time payment related to an overseas project comprises 10% of its capital spending in 2009, making the actual capital program less than reported. About 76% of the $22.8 billion is alloted to upstream exploration and development of oil and natural gas projects. The majority of Chevron's upstream activity occurs internationally on projects in Nigeria, Angola, Brazil and others. For companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), which generate a high percentage of revenues outside of North America, this comes as welcome news.

Drilling deeper still, Chevron plans to spend $3.6 billion on the U.S. Upstream. While the company is correct in stating that overall spending for 2009 is flat with that of 2008, the company spent $5.5 billion in the U.S. Upstream in 2008. Thus, spending in this area has been cut substantially for 2009 and also falls below the $4.5 billion it spent in 2007.

Chevron did not disclose whether these cuts are concentrated on land or offshore, but the reductions do not bode well for land drillers like Patterson-UTI Energy (Nasdaq:PTEN). In its recent report on drilling activity for January 2009, Patterson-UTI stated that it operates 162 rigs in the U.S. and Canada - a sharp decline from the 213 rigs it operated in December 2008.

During the conference call, Chevron CEO Dave O'Reilly reported a slowing down of development in Colorado's Piceance Basin due to "onerous environmental regulations" and a tenuous pricing outlook in that area. (Conference calls give the average investor a chance to hear management respond to analysts' hard-hitting questions. Learn more in Conference Call Basics.)

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Production Growth

Chevron also suffered from a problem that has plagued most other large, integrated oil companies - lack of growth in production. In 2007, it produced 2.61 MBOED (million barrels of equivalent per day), compared to 2.53 MBOED in 2008. Some of the decline in production can be attributed to the impact of hurricanes in the Gulf of Mexico. However, the delay in start-ups of large projects and mandatory curtailments from foreign governments also were factors. Thus, the company is not considered to be in a major growth mode.

Bottom Line
Chevron's recent earnings report showed a slowing of production growth. The company's conference call confirmed the slowdown, with management reporting that the company would not meet its compound annual production growth estimates of 3% for 2005 to 2010. Although Chevron's capital spending in 2009 is flat with that of 2008, large declines in North American Upstream spending helps paint the growth picture - or lack thereof - for 2009.

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