EY: CAPEX Spending Declines, US O&G Reserves Rise

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US oil and gas CAPEX spending declined from 2012 to 2013, but US oil and gas resources kept growing, Ernst & Young's annual oil and gas reserves study.

Total capital expenditures (CAPEX) for the top 50 oil and gas companies declined 7 percent to $173.5 billion in 2013 from $186.0 billion in 2012, as companies shifted spending towards development and away from unproved property acquisition and exploration activity, according to Ernst & Young’s (E&Y) U.S. Oil and Gas Reserves Study for 2014.

The seventh annual study examines U.S. exploration and production spending and performance data over the past five years for the largest 50 oil companies based on end-of-year oil and gas reserve estimates. The study broke down the companies into independent, large independent and integrated oil and gas companies.

E&Y attributed the decline in CAPEX spending to advancements in technologies and processes that are making exploration and production lower cost and more efficient. CAPEX spending from 2012 to 2013 declined primarily due to the decrease seen in unproved property acquisitions, from $33.9 billion in 2012 to $22.8 billion last year. Exploration spending from 2012 to 2013 declined from $26 billion in 2012 to $22.1 billion in 2013. Exploration costs declined 15 percent from 2012 to 2013, but exploration spending in 2013 was the second highest of the five-year study period.

Meanwhile, development spending rose from $103.5 billion in 2012 to $106.7 billion last year.  Development spending has increased every year in the five-year study period, driven mostly by integrated oil and gas companies. The acquisition of proved properties remained relatively flat from 2012 to 2013, with acquisitions of $22.1 billion and $21.5 billion respectively.

Freeport McMoRan’s acquisition of Plains Exploration and McMoRan Exploration in mid-2013, and Linn Energy’s acquisition of Berry Petroleum in December 2013, dominated transaction activity last year, said Herb Listen, U.S. oil and gas assurance leader for E&Y, in a June 24 press briefing.

Linn’s acquisition of Berry was unique in that Berry, a public C-Corp. company, was acquired by an upstream master limited partnership (MLP). Berry’s mature, longer life assets are a good fit for Linn, an MLP that needs a steady future income resource, Listen noted.

The shift from acquisition and exploration to exploitation also is occurring as companies respond to investor and analyst pressure to turn their investments into cash flow, said John Russell, U.S. oil & gas assurance leader for E&Y, during the press briefing.

Despite the decrease in CAPEX spending, U.S. oil and gas reserves rose 9 percent between 2012 and 2013, E&Y officials noted. End-of-year oil reserves for the companies increased in each year the study covered, 2009 through 2013, with reserves reaching 25.4 billion barrels last year. Last year, extensions and discoveries were 4.1 billion barrels and contributed to an oil production replacement rate of 222 percent, excluding purchases and sales.

End-of-year natural gas reserves grew by 9 percent in 2013 from 163.9 trillion cubic feet (Tcf) in 2012 to 178.7 Tcf last year, following the decline in 2012 due to downward reserve revisions caused by depressed gas prices. The level of gas reserves remain below that seen in 2011. Gas extensions and discoveries of 29.9 trillion cubic feet were reported last year, and the gas production replacement rate was 229 percent, excluding purchases and sales.

An 11 percent rise in revenues and significant decline in property impairments resulted in a 53 percent increase in after-tax profits for the 50 companies studied to $33.4 billion. The previous E&Y study showed a 58 percent decrease in after-tax profits for 2012, a decline attributed to lower gas prices. Revenues grew primarily due to the increase in oil production and higher average oil prices.

Property impairment costs declined significantly, from $23 billion in 2012 to $8.1 billion in 2013. In 2012, record low natural gas prices forced a number of companies to revise their reserves estimates downward. While natural gas prices have improved, prices remain low, however. Low gas prices negatively affected in particular Devon Energy, Pioneer Natural Resources and WPX Energy, which each recorded more than $1 billion in property impairments.

Oil prices remained relatively constant from 2012 to 2013, while natural gas prices recovered somewhat in 2013 from 2012. However, a disconnect still exists between oil and natural gas prices on the revenue side, said Russell.

The study found that the industry is emerging from years of volatility brought on by the 2008 global economic crisis and subsequent recession.

“The promising oil and natural gas reserves and profit increases are certainly signs that the industry is enjoying more stability than it has in recent years,” said Deborah Byers, oil and gas leader for E&Y in the United States, in a June 24 press release.

The amount of money that industry is plowing back into resource development indicates that the industry is better on itself, said Russell. From 2009 to 2013, a plowback percentage of 129 was seen by the top 50 oil and gas companies. In 2013 alone, industry made significant investments into operations at a plowback rate of 125 percent. In 2010, the plowback percent – or revenues less production costs -- was 163 percent due to substantial property acquisitions. Companies surveyed for the study are not only using up cash flow, but investing in their businesses beyond cash flow, Russell noted.

In 2009, oil and gas companies plowed back only 84 percent of their earnings into operations. However, companies had pulled back on their CAPEX following the nosedive in oil and gas prices in the second half of 2008 and uncertainty of the pricing environment following the 2008 economic crisis, Russell said.

E&Y found that U.S. independent and large independent oil and gas companies continue to dominate U.S. shale play activity, with companies such as Apache Corp. and Continental Resources are really moving the need on oil reserve growth, said Listen. Independents and large independents drove growth in oil reserves, which rose 52 percent from 2009 to 2013. Large independents on a peer group basis also accounted for the largest increase in gas reserves last year, according to the study.

Independents and large independents also led integrated companies in terms of oil and gas production replacement rates.

These companies have been more nimble in acquiring acreage and building footprints in shale plays, while large integrated companies have sold off shale acreage and realizing they might not be in as good of position in terms of economies of scale, said Listen.

“In shale plays, it’s important to have economies of scale,” said Listen. “Lots of companies may have acreage, but they want significant acreage attached to infrastructure to reduce costs associated activity.”

The first wells in shale plays such as the Eagle Ford and Tuscaloosa Marine Shale play were very expensive, Listen noted. These companies are now focusing on reducing costs and increasing returns in their existing shale acreage as they determine which technology and strategy is needed to unlock reserves.

The U.S. shale boom is also significantly impacting oilfield service companies, with significant demand for oilfield services for shale exploration and development. Oil and gas companies are gravitating towards oilfield service companies with the most innovative technologies and most nimble in deploying services.

This demand for innovation or specific technologies means that companies are not always calling on the largest oilfield service companies, but on a smaller and medium sized companies. For these reasons, Listen sees great opportunities in oil and gas for non-traditional service companies, particularly for technology for deploying the hydraulic fracturing process in a cost-efficient manner.

As companies focus on efficiency in exploration and production, they’re also seeking to control costs. Companies also are paying more attention to whether they have the capital to cover their reserves, and the U.S Securities and Exchange Commission laws regarding reserve development, ensuring that they have plans in place to convert proven undeveloped reserves into producing assets.

The study encompassed both onshore and offshore operations, said Russell. While the Gulf of Mexico is facing a lot of regulatory pressures right now – along with higher costs – tried and true Gulf of Mexico operators are still seeing great cash flow and reserves from the area.

The study did not cover smaller oil and gas companies, many who are spending significantly on U.S shale resources, said Russell. Access to capital for smaller companies will remain an issue; to address this issue, creative financing structures are being implemented, said Russell.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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