Exxon, Chevron Likely to Lift 2010 Capital Spending

HOUSTON (Dow Jones), Nov. 13, 2009

Oil giants ExxonMobil Corp. and Chevron Corp. are expected to inch up their capital spending in 2010 and continue their massive investments in major projects in an effort to lift production.

The increases, which would come amid an improved outlook of the global economy and hopes of sustained higher commodity prices, would sharply contrast with rival ConocoPhillips' decision to reduce 12% its next-year capital budget. Some analysts said this reduced level of spending will make it difficult for the Houston-based company to maintain production or continue with projects that require intense capital allocation.

The recent rebound in oil prices to over $79 a barrel from a year's low below $34 in February and forecasts that oil demand would increase next year, could allow ExxonMobil and Chevron to continue boosting their capital spending, which was undeterred by the economic crisis and the subsequent collapse of oil prices from records above $145 a barrel last year.

But Conoco will likely dance to a different tune. On Oct. 7, the company announced a major restructuring to shore up finances that included a cut in its 2010 budget to $11 billion from $12.5 billion in 2009.

Conoco's new budget doesn't leave room for three major expansion projects: the refinery upgrade at Wilhelmshaven in Germany, the Abu Dhabi sour gas project and the Yanbu refinery in Saudi Arabia, said Paul Sankey, an analyst at Deutsche Bank, in a report released Wednesday. Sankey says Conoco, the third largest U.S. oil company by market capitalization, won't hesitate to cancel the projects in the Middle East regardless of "long term diplomatic damage."

In the case of ExxonMobil, the Irving, Texas-based company is expected to spend in 2010 at the high-end of its previously announced target of $25 billion to $30 billion per year, said Fadel Gheit, analyst at Oppenheimer & Co. Inc. A substantial part of Exxon's 2010 budget, which will be announced in March, would go toward the first allocation of the massive, Chevron-led Gorgon liquefied natural gas project in Australia that was sanctioned in September and has a pricetag of $37.1 billion.

Exxon said this year's budget, which the company said last month will be unchanged from its 2008 budget but $3 billion lower than the company's initial forecast, benefited from lower costs and delays in projects approvals.

The Gorgon project is also expected to be a big chunk of San Ramon, Calif.-based Chevron's next-year capital budget, which will be unveiled in December. Chevron, whose 2009 capital budget is $22.8 billion, has several multi-billion dollars projects that need capital outlays, which would boost spending.

"I can't imagine with all the projects Chevron has in the pipeline that their budget will be any lower than this year," said Phil Weiss, analyst at Argus Research in New York. "They have a lot going on."

The three largest U.S. oil companies by market value are also seen as slightly raising their dividends and maintaining their conservative approach to share repurchases. It's unlikely that Chevron or Conoco will reinstate their share-buyback programs--which were suspended last year. ExxonMobil is expected to continue to be the only oil major buying back stock, but at a reduced pace of about $2 billion per quarter, said Pavel Molchanov, a Houston-based analyst with Raymond James.

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