Recent announcements from various exploration and production companies show a mixed reading on the direction of spending in 2011 on oil and gas exploration and development in the United States and abroad.

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The Players
QEP Resources
(NYSE:QEP), which spun out of Questar (NYSE:STR) in July 2010, recently announced that spending at the company's QEP Energy subsidiary would total $1.05 billion in 2011, down from $1.16 billion in 2010. Sixty percent of this spending would be in the mid-continent area and QEP Resources still expects to grow production by a mid-teen percentage in 2011.

Energen (NYSE:EGN) will spend approximately $353 million in 2010 on oil and gas exploration and production activities. The company plans to increase this capital spending to $510 million in 2011. This extra spending is powered by a large increase in development spending in the Permian Basin, a mature area in Texas and New Mexico that has seen a resurgence of activity over the last two years.

Petroleum Development Corp (Nasdaq:PETD) recently announced development capital spending of between $205 million and $240 million in 2011. Most of this will be spent on developing the Niobrara Shale in the Wattenberg Field and the Wolfberry formation in the Permian Basin. In 2010, Petroleum Development Corp allocated $141 million in development spending. The 2011 capital budget will increase production by 20% to 25% in 2011 over 2010.

Inconclusive, for Now
None of these data points are representative enough of the industry to make a call on total 2011 spending yet. However, one thing that is clear is that the spending trend away from natural gas to oil and liquids development will continue in 2011.

Also, some exploration and production companies are being forced to increase spending in the current year due to increases in the cost of oil services. In November 2010, Petrohawk Energy (NYSE:HK) raised its capital budget for 2010 to $2.55 billion, from the previous amount of $2.13 billion. The company cited service cost inflation, mostly in the Eagle Ford and Haynesville Shale.

Healthy Spending
Despite the mixed announcements from the industry, surveys from industry consultants indicate healthy spending relative to the decline seen in 2009. Wood Mackenzie estimates that global upstream capital spending in 2010 will reach approximately $380 billion.

This represents a $19 billion increase over the level of spending in 2009, but it's still 10% below peak levels seen in 2008. Wood Mackenzie is optimistic on the trend of upstream capital spending and estimates that peak levels should be reached by 2012 or 2013. Spending in the United States will recover sooner and may hit 2008 levels by next year, according to Wood Mackenzie.

Bottom Line
Early announcements from the industry on oil and gas exploration and development spending is mixed for 2011. The trend away from natural gas to oil and natural gas liquids continues. (To learn more, see our Oil & Gas Industry Primer.)

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Tickers in this Article: EGN, HK, PETD, QEP, STR

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