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.

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  3. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  4. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center