Is Oil And Gas Capital Spending Bottoming Out?

By Eric Fox | January 21, 2009 AAA

The final round of energy companies are releasing its 2009 capital spending budget this month and the levels should be closely watched by energy investors as it will help determine how brutal the downturn will get for the oil services and drilling companies.

The latest company to release its budget was Conoco-Phillips (NYSE:COP), the third largest domestic integrated as measured by market capitalization. The company announced a total capital budget of $12.5 billion, with $10.3 billion for exploration and production. (Drill down into financial statements to tap into the right companies and let returns flow, find out how in Unearth Profits In Oil Exploration And Production.)

Just to show how quickly things have changed in the Energy markets in one quarter, in October at its third quarter conference call, Jim Mulva, the CEO of Conoco Phillips said "we expect that we will most likely have a capital program in 2009 that looks a lot like what we're going to experience in 2008, which is in the neighborhood of, say, $15 billion."

Investors should also consider the deflation of service costs when thinking about capital budgets. When a company decides on a capital budget for the year, it builds into the number an assumption about how quickly costs will rise, or in the case of a downturn, how quickly they will fall. An example would be an assumption that day rates for land rigs would average $15,000 a day during 2009. If costs deflate quicker than that, to $12,000 a day, then the company will have more money to spend and could possibly drill more wells.

Also, companies incorporate an assumption on commodity prices for the year into its capital spending plan. Talisman Energy (NYSE:TLM), a Canadian producer recently announced a capital budget of $3.6 billion in 2009. The plan is based on prices in 2009 of $40 per barrel (West Texas Intermediate) for oil, and $5 per million British thermal units (mmbtu) (NYMEX) for natural gas. If the actual prices realized slip below these levels, expect further cuts.

Big Daddy
Exxon (NYSE:XOM) is the 800-pound gorilla of the energy sector, and everyone is waiting for it to announce any adjustments to spending for 2009. In the first nine months of 2008, it spent $19.3 billion on exploration and other capital programs, with a goal of $25 billion for all of 2008. It has maintained publicly that it plans on spending $125 billion over the next five years on capital spending. It will be interesting to see if the events of the last couple of months have changed things.

Some large independents also announced capital budgets last week. Newfield Exploration (NYSE:NFX) said its 2009 capital budget would be approximately $1.45 billion, down from its earlier estimate of $1.65 billion. This is at least the second cut for Newfield. In October, the company revised its 2009 spending from $2.1 billion to $1.65 billion. Newfield spent $2.2 billion, including acquisitions in 2008.

Investors should watch the final round of capital spending announcements by energy companies to gauge the depth of the downturn, and decide on entry points for investing in the services and drilling sectors. They should also be cognizant of what price levels are built into the capital spending plans.

Find out how to take advantage of this market without having to open a futures account, check out A Guide To Investing In Oil Markets.

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