Sales of exploration rights have Canada’s drilling contractors pointing to an aggressive start to 2005, with two leading firms predicting a sharp rise in E&P spending.
U.S. brokerage and investment banker Smith Barney is targeting US$18.74 billion, up 11 percent from its forecast US$16.88 billion in 2004, while Lehman Brothers is targeting an 8.6 percent increase to US$18.6 billion from US$17.1 billion this year.
The Smith Barney survey of 66 companies concluded that E&P spending for 2004 will be far ahead of a year-ago forecast of a 1 percent hike, largely because commodity prices exceeded industry assumptions by 50 percent.
The projections are bolstered by a late flurry of land buying that pushed the 2004 total in Alberta to C$1.11 billion, the second best year on record, and expectations that the industry will set a new benchmark by completing more than 23,000 wells.
Land sales are one of the strongest barometers of industry confidence.
Drilling held back only by lack of trained rig hands
Don Herring, president of the Canadian Association of Oilwell Drilling Contractors, said his sector is operating full blast and expects to end 2004 with an average 613 rigs in the field.
He said that total could be pushed as high as 640 or 650 rigs if trained rig hands were available.
Herring expects land sales will continue at a lively pace into 2005 because there is so much undeveloped land available.
Smith Barney said the outlook for pricing, business mix and individual service sectors are the strongest it has seen since the most recent industry peaks in 1997 and 2001.
The survey found that Canadian E&P companies overspent their budget forecasts by 1 percent from a poll taken at the end of 2003 and by 8.9 percent in a survey taken this month.
By mid-2004, 61 percent of Canadian companies had exceeded their original budgets, 31 percent were in line with forecasts and only 8 percent had come up short.
Of the Canadian respondents, 69 percent said their spending plans were determined by attractive drilling prospects, up from 54 percent entering 2004.
Other key factors for 2005 were: operating cash flow 63 percent, commodity prices 57 percent, targeted production growth 31 percent, availability of capital 14 percent, recent drilling successes 9 percent and operating costs 3 percent.
However, only 17 percent said they would hike their budgets if oil prices rose $3 per barrel above the survey’s average assumption of $36.99, while 17 percent also said they would change their spending plans if prices fell by $3 below the base level.
Companies plan to under spend cash flow
For the sixth straight year, a majority of Canadian companies — 55 percent in 2005 — said they would under spend their cash flow.
The survey also pointed to a shift back to oil-related project from gas-targeted operations, with 47 percent of the firms planning a move to oil, including the oil sands.
On exploration vs. development spending, 48 percent said they would not change in 2005, 26 percent plan a shift to greater exploration and 26 percent said they will increase development spending.
The economics of drilling were better than purchasing reserves in 2004, 95 percent said, while 60 percent said they are actively trying to buy reserves, down from 70 percent a year ago.
Asked to list the three regions with the greatest exploration potential, the respondents listed Canada at 76 percent, Gulf of Mexico/U.S. at 33 percent, Europe 24 percent and Latin America 10 percent.
In Canada the economics of oil exploration were rated as favorable by 59 percent, up from 40 percent a year ago, while gas got a 75 percent favorable rating, compared with 77 percent in 2003 and 90 percent in 2000.
Finding and development costs were said to be on the rise by 55 percent of the companies, stable by 21 percent and lower by 24 percent.
Largest gains from Canadian Natural Resources
The Lehman survey of 75 Canadian companies found that the largest gains would come from Canadian Natural Resources, up 37 percent, Shell Canada 33 percent, Devon Canada 29 percent, Burlington Resources Canada Energy 29 percent, Nexen 17 percent, Husky Energy 15 percent, Penn West Petroleum 15 percent and Petro-Canada 13 percent.
On the international front, Nexen, after buying EnCana’s North Sea assets, plans an 86 percent hike in its 2005 spending, followed by Canadian Natural Resources at 46 percent, Talisman Energy at 45 percent and PetroKazakhstan at 9 percent.
Drilling was preferred over buying assets by 81 percent of the respondents, compared with 76 percent a year ago.
Drilling economics were seen as good or excellent by 53 percent of the companies, down from 59 percent a year earlier, although 91 percent expect drilling costs will grow, the bulk anticipating a rise of 10-20 percent.
The average budgeted price for oil by the Lehman respondents is $35.81 per barrel for West Texas Intermediate and $5.39 per thousand cubic feet (Henry Hub).
Only 20 percent said they will invest more than their cash flow in E&P in 2005.
Lehman said the key factors in determining E&P spending, in order of priority, are: cash flow, prospect availability,, natural gas prices, oil prices and drilling success.
