Many exploration and production companies have announced increases to 2011 capital budgets as the cost to explore and develop acreage oil and gas properties continues to grow. These increases are caused by service cost inflation as well as increased activity levels by these companies in many basins.

TUTORIAL: The Industry Handbook: The Oil Services Industry

Acquiring New Land
Energen Corp (NYSE:EGN) announced that its capital spending for 2011 will total $783 million, up 18% from the previous level of $664 million. The company said that it would spend an extra $48 million in 2011 to acquire an unproven leasehold and another $45 million to drill and complete additional wells into the Bone Spring formation. Energen Corp is also seeing higher service costs in the Permian Basin and has budgeted an extra $20 million to cover these increases. (Drill down into financial statements to tap into the right companies and let returns flow. See Unearth Profits In Oil Exploration And Production.)

Comstock Resources (NYSE:CRK) also increased its capital budget to $610 million in 2011, with $570 million allocated to drilling and completion services and $40 million for lease acquisitions. In December 2010, Comstock Resources announced a $522 million budget for drilling and completion activities. Comstock Resources said that the $40 million would be used to purchase exploratory acreage that is prospective for the Eagle Ford Shale. The company said that the extra drilling and completion funds are needed because the company has increased its drilling efficiencies in the Haynesville Shale area, allowing the company to drill more wells.

Rising Costs
Chesapeake Energy
(NYSE:CHK) raised its 2011 drilling capital budget to a range from $5.5 billion to $6.0 billion, up from the previous range of $5.0 billion to $5.4 billion. The company indicated that the increase was due to an unanticipated surge in oil service costs.
"This is driven by a combination of factors that is primarily related to oilfield service cost inflation," said Nick Dell'Osso, the CFO of Chesapeake Energy. Dell'Osso said that the primary service line driving the increase was completion costs. Chesapeake Energy is attempting to deal with this inflation in service costs through vertical integration. The company reported in its first quarter of 2011 earnings release that it felt its oil service businesses were worth $7 billion. Chesapeake Energy is also building up the company's own hydraulic fracturing fleet with a goal of reaching 750,000 horsepower. (Inflation can be driven by particular commodities which may actually dampen the economy. See Coping With Inflation Risk.)

The Unexpected
SM Energy
(NYSE:SM) will spend an extra $40 million in 2011, bringing its total capital budget to $1.08 billion. The extra funds will be spent in the Haynesville Shale and weren't included in its original budget as the company assumed that it would have found a partner by now to help with the cost of developing this formation.


Bottom Line
The energy business requires significant amounts of capital expenditures as the exploration and development of oil and gas resources is an expensive and difficult endeavor. These expenditures continue to rise in the first quarter of 2011. (Find out how to invest and protect your investments in this slippery sector. See Peak Oil: What To Do When The Wells Run Dry.)

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Tickers in this Article: CHK, SM, EGN, CRK

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