|
Canada taking cautious route Capital spending forecast to drop 6.6 percent in 2007 because of upstream inflation, natural gas uncertainties, rest of world Gary Park For Petroleum News
On the capital spending teeter-totter, the rest of the world is headed up in 2007 while Canada takes a dive.
Predictions made by Citigroup Research, a division of Citigroup Global Markets, said global spending in the upstream sector will climb by 7 percent, almost matching the 6.6 percent drop forecast for Canada.
The annual survey on exploration and production budgets points to a 5.7 percent increase in the United States and 9.9 percent on the global front (excluding the U.S. and Canada).
Citigroup said its confidence in North America is shaken by the uncertainties in natural gas markets.
It said some operators, especially in Canada “where price increases have been seen as excessive,” with operating costs climbing about 20 percent in 2006, have opted to make deep spending cuts in hopes of eroding service sector costs.
However, Citigroup said several large operators have expressed the view that oilfield pricing is just closing the gap on oil and gas prices over the past several years “and project economics remain compelling.”
“We believe this dichotomy signals a new phase in this cycle where price increases and margins will increasingly be linked to field performance,” the firm said.
The 25th annual survey by Citigroup covered responses from 237 oil and gas companies, in which project spending in 2007 of US$282.6 billion compared with $264 billion in 2006, with overall North American up 2.1 percent at $98.5 billion including a 5.7 percent hike in the U.S. to $71.8 billion and Canada’s 6.6 percent drop to $26.7 billion.
Citigroup expects spending above initial plans But Citigroup expects a trend of overspending initial plans will continue in 2007.
For 2006, the actual spending growth is estimated at 26.4 percent compared with the initial prediction of 14.1 percent and included overspending in the U.S. of 37.8 percent and 15.6 percent in Canada.
That represents the seventh consecutive year that Citigroup’s initial spending forecasts have been significantly surpassed.
The firm said the pattern is likely to “persist in 2007 although to a lesser degree as oil and gas prices are less likely to exceed expectations by the same magnitude.”
For the oil service and drilling sector, Citigroup said the fundamentals remain strong, but operating performance will hold the key.
“However, the increased operator resistance to price increases signals a new dimension to the cycle,” the survey said. “We reiterate our view that the rising-tide-lifts-all-boats phase of this cycle is near the end.”
Lehman Brothers projects 9% growth A semi-annual Lehman Brothers E&P spending survey said worldwide expenditures by 300 companies should grow by 9 percent on average to $291 billion, or 13 percent outside North America, following total upstream spending increases of 20 percent in 2005 and 30 percent in 2006.
The survey said Canadian spending should decline by 8 percent to $22 billion following Anadarko’s departure from the arena and Devon Energy’s announced cutback in conventional gas drilling. That comes on the heels of a 19 percent hike in 2006.
For the U.S., Lehman Brothers anticipates a modest 5 percent increase, largely reflecting concerns about cash flows and gas prices.
In Canada’s service sector, capital spending could slide by as much as 50 percent in 2007 because of uncertainties over gas prices and the future of income trusts, said Tristone Capital analyst John Tasdemir.
He said the anticipated 2006 spending of C$4 billion could be slashed to a half or a quarter in 2007 given the emotional state of the market.
Service sector may be overbuilt Roger Soucy, president of the Petroleum Services Association of Canada, said the service sector is probably overbuilt because of its eagerness to take advantage of an up-cycle.
He now expects major orders for large equipment will be sharply curtailed in 2007.
Soucy said his association is counting on a 1,300-well increase in crude oil drilling in 2007, but a “significant drop” in gas activity.
The key to gas drilling is a sharp drop in temperatures in the first quarter of 2007 to deplete gas storage inventories; otherwise commodity prices will weaken further and extend what Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, described as an “unsettling” downturn in field activity over the final four months of 2006.
Investment dealer Peters & Co. is already braced for a 30 percent drop in drilling in the first quarter, saying the sense of urgency that triggered a ramp-up of activity levels in late 2005 is absent this winter. EnCana leads Canadian retreat The retreat in Canada is being led by EnCana, which plans to cut its capital spending by 6 percent from 2006 to US$5.9 billion, although its oil sands projects are budgeted for a 17 percent rise to $700 million.
If it sticks to that path, the big independent will lower output to 717,000 barrels of oil equivalent per day.
Chief Executive Officer Randy Eresman said high industry activity and high inflation have forced EnCana to reign in its production goals to reduce the impact of rising costs and related operating inefficiencies.
He told analysts that continuing at a high rate of growth is challenging at a time when the industry “lacks quality goods and services.” As a result, EnCana is taking its foot off the accelerator until the situation improves.
However, Eresman left the door open to resuming more normal growth if signs that Canadian upstream costs are easing begin to firm up.
Others looking at flat growth Canadian Natural Resources has also taken a break from chasing natural gas production growth, putting its emphasis on the oil sands.
Talisman Chief Executive Officer Jim Buckee, in announcing that the company’s capital spending will be essentially unchanged in 2007 at C$4.8 billion while production will essentially remain flat, said he is “mindful of the need for capital discipline given industry cost inflation, maintaining a strong balance sheet and investing in high-return projects.”
He said exploration and development spending will be kept “within the range of projected cash flow for the next year.”
For investors, there could be better returns in 2007 than 2006, so long as crude oil and natural gas prices remain comfortably high.
UBS Canada strategist George Vasic is forecasting an average rise of 39 percent in earnings for companies that are on the Toronto Stock Exchange energy index after an almost flat 2006.
That target is based on oil prices of US$69 a barrel and gas at US$7.60 per million British thermal units.
BMO Nesbitt Burns analyst Randy Ollenberger is looking for a quiet opening quarter, but said the fundamentals are in place for a rally through the year when he expects crude to climb to the US$65-$70 range and gas to reach a robust US$8-$9. l
| 