Producers who had already increased their 2005 capex plans are boosting them further, according to a midyear spending-survey update from Citigroup Smith Barney. Producers' new plans represent the strongest oil-service demand increase since 2001, reports Geoff Kieburtz, an analyst with the firm. The 201 companies Kieburtz surveyed plan to spend $191.8 billion in 2005, up from actual spending of $169.4 billion in 2004 and up 8% from their original 2005 capex budgets. Among the 126 companies with U.S. capex plans, spending is to total $43.7 billion this year, up from actual spending of $37.6 billion in 2004, Kieburtz reports. "With independents and majors driving the growth, almost 45% of respondents have increased spending plans since December for an aggregate increase of 4%." The 74 producers with Canadian capex plans report budgets that total $20.1 billion, compared with actual spending of $18.6 billion in 2004. Meanwhile, non-North American capex is projected to grow 13.1% and oil-price assumptions have increased to more than $40, Kieburtz reports. He expected in late 2004, when last conducting the survey, that spending would grow beyond producers' original estimates, including an expansion of international activity. He now expects the largest budget boosts will be for E&P outside North America. "Although it was noted that a trend of overspending original budgets has developed over the last five years, the strength of the upward revisions in this survey surpasses anything we have recorded in at least the last 15 years," he reports. "Almost half of all respondents have raised their spending plans for 2005 since our survey in December." The surveyed producers are basing their 2005 capex budgets on $40.46 West Texas Intermediate, up 10% from their expectations in December 2004. The adjustment lags the 23% increase in the futures strip, which now stands at $55.77, he says. "In addition, the sensitivity band around the average assumption has widened, indicating that a steeper decline in oil prices would be necessary to trigger a spending reduction than in the past. Likewise, a steeper increase would be required to trigger a spending increase." As for natural gas prices, assumptions and sensitivities have not changed significantly during the past six months, he adds. Why aren't producers spending yet more on E&P? Too few workers, Kieburtz was told. "The most frequent response was that personnel was a limiting factor in either their ability to perform more work outright, or more commonly, to perform more work efficiently." That and capital discipline were the two main reasons for limitations on spending growth, Kieburtz reports. Another issue is prospect availability. Smaller companies told Kieburtz they would spend more if they could secure land positions. Larger companies complained they are restricted by their partners or host governments. Very small operators were limited by a lack of funding, and more companies named rig availability as an obstacle. In another finding, Kieburtz says spending plans appear to be under review on a more continuous basis now. Half of the respondents reported being currently in the review process while only 30% were at midyear 2004. Smaller operators' E&P budgets are growing disproportionately faster-in percentage-than are larger operators' E&P budgets. "This greater significance of smaller operators is a mixed message. On one hand, it represents a broadening of the market growth, which should be a positive for the oil-service industry. On the other hand, if it is assumed that the spending behavior of the smaller operators is more sensitive to fluctuation in oil and gas prices, it may foreshadow somewhat greater demand volatility." The analyst believes room remains for oil-service stock prices to grow. "We continue to believe that the market has prematurely discounted a cyclical peak in the industry and that current prices represent an attractive buying opportunity in many names." The current E&P marketplace is nothing like that of the 1970s, however, he adds. "We do not believe current conditions are as good as they were three decades ago, but they appear better than at any time since then." -Bertie Taylor
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