|
Key North American E&P companies keep tight grip on capital spending U.S. and Canadian independents make only cautious moves to pump up spending, while paying attention to bottom lines and debt reduction Gary Park PNA Canadian Correspondent
Edgy about continuing price volatility and uncertain about economic recovery, North America’s independent E&P companies are exercising prudence in converting their cash reserves into higher capital spending.
Having been accused of overpaying for assets last year when the market was at its peak, many companies are giving priority to returns on investment and debt reduction.
The limited hesitant moves to increase 2002 budgets have often been directed at international oil projects, where OPEC production cuts have kept prices relatively high against U.S. natural gas prices and, among Canadian-based companies, to hike oil sands expenditures.
Analysts predict capital declines Lehman Brothers predicted in June that capital expenditures will decline by 20.2 percent this year in the U.S. and by 20.7 percent in Canada.
A Nickle’s Oil and Gas Statistics quarterly survey of Canadian producers pointed to spending of C$20.05 billion (US$12.8 billion) this year, down 17 percent from last year’s C$24.27 billion (US$15.5 billion).
Following a frenzy of takeovers last year, many companies have also been focused on internal corrections.
Here’s a sampling from key North American producers of their first-half performances and what they have planned for the second half:
Devon Energy Devon Energy Corp. has sold properties in the United States and Canada for US$1.2 billion this year, lowering its long-term debt to US$7 billion — but that is still about $5.7 billion more than it held before its hefty acquisitions of Mitchell Energy & Development Corp. and Anderson Exploration Ltd. in 2001.
The company warned earlier this year that unless it reduced debt to the extend desired through divestments or other cash sources could result in unfavorable actions by credit rating agencies.
It has also taken a US$371 million after-tax writedown on the value of its Canadian assets, following a late second-quarter collapse of natural gas prices, to comply with U.S. Securities and Exchange Commission requirements relating to full cost methods of accounting.
Anadarko Petroleum Anadarko Petroleum Corp, Devon’s big rival among the ranks of independent gas producers, gave a 10 percent infusion to its capital budget, crediting an influx of cash from higher-than-expected commodity prices. The new US$2.2 billion budget will be partly financed from proceeds of $320 million in asset sales, starting with the disposal of US$160 million in Alberta heavy oil properties.
“We’re carefully monitoring our spending,” said chief executive officer John Seitz. “We’re spending within cash flow.”
The projects to benefit include Anadarko’s first exploratory well in deepwater Gulf of Mexico acquired in a lease sale last year and deep exploration wells in northern British Columbia.
Burlington Resources Burlington Resources Inc. has also recently raised US$900 million from selling assets in mature areas such its U.S. base, lowering its debt to less than 50 percent of total capitalization, far ahead of its target of year-end 2003. Because of the prices it obtained in the sales, Burlington also raised its threshold on divestitures to US$1.3 billion from US$1.2 billion.
The Houston-based company said its oil and gas production grew by 13 percent in the second quarter, largely because of key acquisitions in Canada such as last year’s purchase of Canadian Hunter Exploration Ltd. for C$3.3 billion (US$2.1 billion) and Atco Gas properties for C$550 million (US$352 million).
Jonathan Wolff, an analyst with Wachovia Securities, said Burlington has put the emphasis on what it does best by “selling higher-cost assets with steeper rates of production decline and focused on U.S. and Canadian onshore assets which tend to have lower decline rates and better returns.”
Burlington chief executive officer Bobby Shackouls, who believes industry consolidation is “going to continue,” said in July that his company could make purchases that shore up its core gas projects in the Rocky Mountain fairway that extends from New Mexico’s San Juan basin to the Western Canada Sedimentary Basin once third-quarter deals see Burlington exit its Gulf of Mexico Shelf blocks, which did not provide the desired returns on capital , along with acreage in the North Sea, the U.S. Williston basin and Canadian oil holdings.
But Burlington intends to leave its US$1.3 billion capital budget for the year unchanged, he said.
El Paso El Paso Corp. took a US$234 million pre-tax ceiling test charge in the second quarter, largely on the Canadian oil and gas properties that were part of its US$232 million purchase of Velvet Exploration Ltd. in 2001 — a deal that included a 15 percent premium over Velvet’s closing share price and that analysts rated as high at the time.
The Houston-based giant ended 2001 by setting a goal of generating US$2.25 billion by shedding E&P, refinery and coal assets to strengthen its capital structure and enhance liquidity.
In its second quarter report, El Paso said it intends to fund its capital spending with operating cash flow from its core business and, to that end, hopes to sell up to $2 billion in non-strategic assets on top of the 1 trillion cubic feet of natural gas equivalent proved reserves, or 15 percent of its total proved reserves.
As part of its repositioning, the company said it will reduce 2003 capital spending by US$900 million to about US $3 billion, with E&P activities lowered by US$700 million to US$1.6 billion.
El Paso chief executive officer William Wise told an Aug. 8 conference call that “capital markets are uneasy and we think that it’s prudent therefore to be operating in a way in which our balance sheet and conservation of capital are our leading objectives.”
He said capital spending will be “throttled back” in 2003 and beyond to live within operating cash flow, which he said is a “reliable” $3 billion.
Forest Oil Reflecting the edginess among the smaller independents, Forest Oil Ltd., whose net earnings toppled to US$9.2 million in the first half of 2002 from US$131.9 million in the same period last year, takes a blunt view of its capital spending.
It said the budget is still in the range of US$250 million-$350 million, including third-quarter spending of US$60 million-$90 million depending on the “absolute crude oil and natural gas prices, the volatility of these prices and the cost and availability of oilfield services.”
Forest actually entered 2002 with approval for an overall capital budget of US$250 million, down from US$564.6 million last year, and had slashed its Canadian spending plans to about US$20 million from US$63.1 million in 2001.
Chairman and chief executive officer Bob Boswell said in February the company’s “outlook for lower hydrocarbon prices drives our 2002 budget,” saying that how a company plays the industry’s cycles “often makes the difference between winners and losers.”
The only exception to business units living within their cash flow was the Cook Inlet Redoubt Shoal discovery, he said. Otherwise, Forest’s northern activities include other Cook Inlet interests — operated and non-operated, non-operated North Slope interests, exploration activity in the Copper River basin and its working interests in the Fort Liard gas play of the Northwest Territories.
Canadian expenditures jump In Canada, 11 of the major producers made capital expenditures of C$8.82 billion (US$5.64 billion) in the first half — a jump of about C$1.8 billion (US$1.2 billion) from 2001.
But the figures were distorted by Petro-Canada’s C$2.16 billion (US$1.38 billion) purchase of international properties from Germany’s Veba Oil & Gas GmbH and Shell Canada Ltd.’s continued cost overruns on its Athabasca oil sands project, which was the biggest single item in its first half spending of C$1.2 billion (US$768 million)
Excluding those items, spending was C$352 million behind the first six months of 2001, but was about C$403 million ( (US$768 million) above cash flow for the 11 companies of C$5.45 billion (US$3.49 billion).
EnCana Living up to its “best in class” ambitions, EnCana Corp. has set a cracking pace for the rest of the year by pumping another C$1.2 billion (US$768 million) into its capital program, raising the year’s objective to a Canadian record C$5 billion (US$3.2 billion) .
Of that total, C$3.5 billion (US$2.2 billion) will be spent onshore North America, including C$2.24 billion (US$1.4 billion) on EnCana’s treasured gas holdings.
EnCana chief executive officer Gwyn Morgan, who is not known for conceding problems, said there have been hiccups in getting regulatory approval for the Deep Panuke gas project offshore Nova Scotia and maintenance-related production cuts at the Syncrude Canada Ltd. oil sands operation.
Even so, he told analysts July 26, “EnCana’s progress far outpaced these temporary setbacks.”
To fuel the expanded capital budget, EnCana hopes to sell C$1.5 billion (US$960 million) in upstream and midstream assets.
Petro-Canada Petro-Canada, buoyed by a doubling of its second quarter output as a result of the Veba deal, decided to loosen its purse strings by 18 percent, raising spending plans to C$2.18 billion (US$1.34 billion) from its initial estimate of C$1.85 billion (US$1.18 billion).
It’s revised expenditures are now expected to come in at C$1.68 billion (US$1.08 billion) for the upstream, led by C$515 million (US$330 million) for the oil sands, C$445 million (US$285 million) for Western Canadian gas, C$350 million (US$224 million) for Canada’s East Coast offshore, C$275 million (US$176 million) for international operations and C$90 million (US$58 million) for Mackenzie Delta exploration.
| 