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Burlington may boost spending on strength of commodity prices
Ray Tyson Petroleum News Houston Correspondent
Natural gas producer Burlington Resources says it may end up spending about $500 million or 10 percent more than the $5 billion it planned to spend through 2006 to boost production by 20 percent over the same period.
The decision to spend more largely would depend on increases in oilfield service costs and the company’s growing confidence in gas prices.
“Today we are evaluating our programs in Canada and the (U.S.) San Juan Basin, where we have very sizeable drilling inventories,” Steve Shapiro, Burlington’s chief financial officer, said in an April 22 conference call with industry analysts.
If Houston, Texas-based Burlington decides to increase capital spending above current levels, he said, it likely would begin during the second half of this year. Based on price scenarios of $4 and $6 per thousand cubic feet, Burlington expects to generate $6 billion to $8 billion in revenues through 2006, meaning the company should have between $1 billion and $3 billion in “excess cash” above the original $5 billion it planned to spend on exploration and production activities, Shapiro said.
“As we get more confident in the sustainability of gas prices (and) we are considering ramping up our E&P spending above our current level of about $1.5 billion a year,” he added. “The question is what to do with the money.” Pressure from service costs Shapiro said Burlington is feeling “some pressure overall” from increasing service costs, particularly in Canada, so a portion of any increase in capital spending likely would be used to help cover those expenses.
On the drilling side, “virtually all” of the company’s 6.5 trillion cubic feet of North American inventory “is handily economic” at gas prices below $4 per thousand cubic feet, with much of it economic at $3 to $3.25 per thousand cubic feet, Shapiro said.
“There is really no economic cut-off issues anywhere near the kind of prices that we’re looking at today,” he said.
Randy Limbacher, Burlington’s chief operating officer, said the difference between a “three-dollar world and a four-dollar world” in the San Juan Basin, for example, adds about 600 billion cubic feet of drilling inventory.
“So we’re going through that (review process) in Canada to see how much might be added to the 2 trillion cubic feet of inventory we have up there,” he said. “This gives you some idea that there is quite a bit of incremental opportunity that comes from price sensitivity.”
Burlington’s daily production, about 90 percent weighted to natural gas, increased to 2.849 billion cubic feet of gas equivalent in the 2004 first quarter from 2.490 billion cubic feet in the 2003 first quarter. The company said it expects to produce 2.606-2.804 billion cubic feet of equivalent during this year’s second quarter.
In addition to possibly using excess cash to increase drilling and pay for increasing service costs, Burlington “will continue to look for suitable acquisitions, although we will be very prudent about that,” Shapiro said. “We don’t feel any pressure to make acquisitions to meet our growth target.”
He said any acquisition Burlington makes would have to measure up to its so-called “base of excellence” standard demonstrated primarily by about 10 core producing areas in the Rocky Mountains corridor between New Mexico’s the San Juan Basin in the United States and Western Alberta in Canada.
“Finally, we still think it’s a good idea to give excess cash back to the shareholders through our dividend and share repurchase programs,” Shapiro said.
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