Energy Companies Raising Capex

By Eric Fox | October 26, 2011 AAA

Several exploration and production companies have used third quarter earnings to raise capital budgets for 2011, as the industry continues to see more oil and gas opportunities, as well as higher costs for drilling and infrastructure.

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QEP Resources (NYSE:QEP) boosted the company's 2011 capital budget for its QEP Energy segment from $1.17 billion to $1.25 billion. The company was a victim of its own successful drilling program, as increased efficiency will allow QEP to complete more wells in the Pinedale and Haynesville formations. QEP Resources also suffered from higher costs to drill non-operated wells and expenses related to a water disposal system to be used in the Williston Basin.

Range Resources (NYSE:RRC) added $90 million to its 2011 capital budget, increasing total spending for the year to $1.47 billion. The company cited an increase in non-operated drilling costs for wells in the Marcellus and Woodford Shale plays. Range Resources is also using the extra funds to lease additional acreage exposed to a Mississippian oil play in Oklahoma, where the company has built up a 105,000 net acre position in Kay and Noble County, in the northern part of the state. Range Resources started the year with only 15,000 net acres here and moved quickly to add acreage, as the company likes the economics of developing this play. The company estimates that wells here will have an estimated ultimate recovery (EUR) between 400,000 and 500,000 barrels of oil equivalent (BOE), with 70% of these reserves composed of oil and liquid hydrocarbons.

Another operator that is active in this play is SandRidge Energy (NYSE:SD), which has more than 900,000 acres and plans to put nearly 50% of its 2012 capital expenditures into this play. The company will report third quarter 2011 earnings after the market closes on Nov. 3. (For an additional reading related to the energy sector, check out Oil And Gas Industry Primer.)

Capital Discipline
One company that is spending within its 2011 capital budget is Conoco Phillips (NYSE:COP). The company spent $3.8 billion in capital, in the third quarter of 2011, and is on target to meet its previously announced $13.5 billion capital budget for 2011.

The irony of Conoco Phillips capital discipline is that, as a major oil company, it is one of the few in the energy sector that can afford to spend more, without having to access the capital markets. Conoco Phillips reported $5.6 billion in cash flow from operations in the third quarter of 2011 and spent almost as much to repurchase its own stock, as to explore and develop oil and gas assets during the quarter. The company spent $3.2 billion to buy back 3% of its own stock.

The Bottom Line
Some investors react negatively when an exploration and production company has to overspend an already established capital budget. However, such unanticipated expenses are an unavoidable part of business and shouldn't be used as an excuse to join the mindless selling that sometimes accompanies this extra spending.

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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