E & P Operators Raising Capex

By Eric Fox | August 05, 2011 AAA

Several exploration and production companies have used the platform of second quarter of 2011 earnings releases to announce an increase in capital spending for 2011. These increases reflect higher costs for various oil services working its way through the system, along with greater oil and gas development opportunities.
TUTORIAL: Financial Statements: Working Capital

SM Energy (NYSE:SM) announced a $470 million increase in the company's 2011 capital expenditure budget, and will spend $1.55 billion during the year, up from $1.08 billion previously. SM Energy will allocate $295 million or 63% of this additional capital to the Eagle Ford Shale, and an extra $90 million to the Haynesville Shale.

While it might seem that SM Energy is accelerating development of the Eagle Ford Shale, the reality is that the company has entered agreements to divest portions of its leasehold. The additional capital is needed because the company sold less acreage than it estimated when it set its 2011 budget. Also, the closing dates of some of the deals are also taking longer than the company expected.

In the Haynesville Shale, the company has decided to continue development on its East Texas acreage through 2012 with the goal of converting all its leasehold to held by production by that time. This goal will require capital of $165 million in 2011 and from $85 million to $95 million in 2012. (A company's efficiency, financial strength and cash-flow health show in its management of working capital. For more, see Working Capital Works.)

Chesapeake Energy (NYSE:CHK) also increased its capital budget and will add $500 million to the company's drilling and completion capital expenditure budget in both 2011 and 2012. The company cited "significant" oilfield service cost inflation as one reason for the needed capital.

Chesapeake Energy also disclosed a large position in the Utica Shale, an emerging unconventional play in Ohio. The company plans to quickly add to its rig count here, moving up from five operated rigs to as many as 20 rigs by the end of 2012.

One thing to consider with the extra capital allocated by Chesapeake Energy is that the company is looking for a joint venture partner in the Utica Shale, and any deal entered into will result in a buyer agreeing to a significant drilling carry. These funds will offset capital expenditures by Chesapeake Energy in 2012. (Venture capital has been around for centuries, but Georges Doriot turned it into a structured field of investment. For more, see Georges Doriot And The Birth Of Venture Capital.)

Rex Energy (Nasdaq:REXX) added $41 million to its 2011 capital budget to cover the acquisition cost of an 11,000 net acre leasehold position in Ohio. The company is targeting the Point Pleasant formation, which lies near the Utica Shale. This extra capital will only cover the lease acquisition costs and the company will have to allocate additional capital in 2012 to cover development costs.

Unit Corp (NYSE:UNT) added $20 million to its 2011 capital budget, bringing total spending by the company to $435 million for the year. The company will use the funds to selectively add leasehold in core areas where it is active.

The Bottom Line
The market is getting more volatile as most investors fret about the slowing economy and the possibility of a default by the U.S. Government. Yet the energy sector parties like its 1999, and it continues to increase capital spending to find oil and gas for a world that may not need as much supply as the conventional wisdom holds. An easy flow of capital usually leads to irrational behavior and a bad ending, and the energy sector may yet suffer this fate.

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