Producers continue to reach deep into coffers to pay finding and development (F&D) costs this year, establishing a yet-higher new U.S. gas-price floor. All-in F&D soared 75% in 2006 to a record $3.29 per thousand cubic feet equivalent (Mcfe), up from $1.89 in 2005, for a 32-company study group. Yet, the trend may soften slightly this year to average $3.13 per Mcfe.
So says Calyon Securities (USA) Inc. E&P analyst Carin Dehne Kiley. She and her colleagues studied 32 U.S. companies' 2006 operational statistics, including revenues, production, margins, profit, cash flow and reserves.
The $3.29 average F&D cost for the 32 companies in 2006 was largely due to increased spending on unproved leasehold (land grabs), a 35% increase in drillbit costs, a 25% increase in acquisition costs and negative net reserve revisions that were largely due to a lower year-end 2006 natural gas price versus that of year-end 2005.
Last year, the study group's total acquisition costs averaged $3.94 per proved Mcfe, up from $2.33 the previous year-a full 70% increase-and a major step change in an upward trend.
"We would point out that E&P companies often allocate a portion of their acquisition costs to unproved properties or non-E&P assets, which can keep the proved acquisition costs low," Kiley adds.
The 32 companies' average drillbit costs climbed 35% to $2.45 per Mcfe in 2006, up from $1.80 in 2005 and $1.43 in 2004. The research found a 25% increase in service costs-no surprise there-and "a nearly 10% decline in reserves added per successful well."
Kiley cites two drivers of this-mature U.S. basins and unconventional plays, which have smaller reserve targets per well than conventional plays.
Some 75% of the revisions were to gas reserves, as Henry Hub prices dropped to $5.50 per million Btu at year-end 2006, down from $9.52 at year-end 2005.
The most important upstream return metric is the recycle ratio, defined as cash flow per Mcfe produced, divided by the all-in F&D cost per Mcfe, Kiley says. The study group reported a recycle ratio of 4.1, a decrease from 2.3 in 2005. The reason for the decline was a 10% increase in cash flow per Mcfe offset by a 75% increase in all-in costs, she adds.
Cash flow for the coverage group is projected to be up in 2007 approximately 2%, she estimates, if all-in costs decrease 3%, resulting in a recovery of the recycle ratio. She further estimates that it would take a 15% decline in all-in costs to allow the recycle ratio to match the five-year average of 1.7.
The study revealed that 219% of gas reserves were replaced by drilling in 2006, an improvement from 2005's 211% and 2004's 186%. The improvement is due to increased gas drilling during the past few years, and booking more proven undeveloped (PUD) reserves, in some cases associated with unconventional plays. The percentage of PUD U.S. gas reserves, for the 32 companies studied, increased to 30% in 2006, up from 28% in 2005 and 19% in 2000, she reports.
The research team tracked the study group's spending on organic growth and acquisitions. According to the results, exploration and development spending was up 40%, spending on acquisitions increased 120% and total costs increased 70% overall.
The percentage of spending allocated to exploration activities continues to decline. Exploration spending, as a percentage of the total, fell to 23%, versus 30% in 2000. She predicts the study group will continue to use acquisitions to grow, while spending less on exploration, and will focus on low-risk development and exploitation projects to increase near-term production.
The study included metrics for future development costs. Overall, future development costs were significantly up in 2006. In addition to the increase in actual costs incurred last year, companies' estimates for future undiscounted development costs rose 20% to $1.85 per Mcfe, up from $1.52 in 2005 and $1.22 the prior year.
The study broke out future development costs for onshore unconventional plays and conventional Gulf of Mexico operations. Kiley expects higher future development costs for Gulf producers, and lower costs for the onshore players.
As for metrics on reserve replacement, the group's average, from all sources, was 277% for 2006, a slight drop from 298% in 2005. This reverses a three-year trend of growth from 2003 to 2005.
Reserves replacement from the drillbit, excluding revisions, dropped to 183% in 2006 from 192% in 2005.
So says Calyon Securities (USA) Inc. E&P analyst Carin Dehne Kiley. She and her colleagues studied 32 U.S. companies' 2006 operational statistics, including revenues, production, margins, profit, cash flow and reserves.
The $3.29 average F&D cost for the 32 companies in 2006 was largely due to increased spending on unproved leasehold (land grabs), a 35% increase in drillbit costs, a 25% increase in acquisition costs and negative net reserve revisions that were largely due to a lower year-end 2006 natural gas price versus that of year-end 2005.
Last year, the study group's total acquisition costs averaged $3.94 per proved Mcfe, up from $2.33 the previous year-a full 70% increase-and a major step change in an upward trend.
"We would point out that E&P companies often allocate a portion of their acquisition costs to unproved properties or non-E&P assets, which can keep the proved acquisition costs low," Kiley adds.
The 32 companies' average drillbit costs climbed 35% to $2.45 per Mcfe in 2006, up from $1.80 in 2005 and $1.43 in 2004. The research found a 25% increase in service costs-no surprise there-and "a nearly 10% decline in reserves added per successful well."
Kiley cites two drivers of this-mature U.S. basins and unconventional plays, which have smaller reserve targets per well than conventional plays.
Some 75% of the revisions were to gas reserves, as Henry Hub prices dropped to $5.50 per million Btu at year-end 2006, down from $9.52 at year-end 2005.
The most important upstream return metric is the recycle ratio, defined as cash flow per Mcfe produced, divided by the all-in F&D cost per Mcfe, Kiley says. The study group reported a recycle ratio of 4.1, a decrease from 2.3 in 2005. The reason for the decline was a 10% increase in cash flow per Mcfe offset by a 75% increase in all-in costs, she adds.
Cash flow for the coverage group is projected to be up in 2007 approximately 2%, she estimates, if all-in costs decrease 3%, resulting in a recovery of the recycle ratio. She further estimates that it would take a 15% decline in all-in costs to allow the recycle ratio to match the five-year average of 1.7.
The study revealed that 219% of gas reserves were replaced by drilling in 2006, an improvement from 2005's 211% and 2004's 186%. The improvement is due to increased gas drilling during the past few years, and booking more proven undeveloped (PUD) reserves, in some cases associated with unconventional plays. The percentage of PUD U.S. gas reserves, for the 32 companies studied, increased to 30% in 2006, up from 28% in 2005 and 19% in 2000, she reports.
The research team tracked the study group's spending on organic growth and acquisitions. According to the results, exploration and development spending was up 40%, spending on acquisitions increased 120% and total costs increased 70% overall.
The percentage of spending allocated to exploration activities continues to decline. Exploration spending, as a percentage of the total, fell to 23%, versus 30% in 2000. She predicts the study group will continue to use acquisitions to grow, while spending less on exploration, and will focus on low-risk development and exploitation projects to increase near-term production.
The study included metrics for future development costs. Overall, future development costs were significantly up in 2006. In addition to the increase in actual costs incurred last year, companies' estimates for future undiscounted development costs rose 20% to $1.85 per Mcfe, up from $1.52 in 2005 and $1.22 the prior year.
The study broke out future development costs for onshore unconventional plays and conventional Gulf of Mexico operations. Kiley expects higher future development costs for Gulf producers, and lower costs for the onshore players.
As for metrics on reserve replacement, the group's average, from all sources, was 277% for 2006, a slight drop from 298% in 2005. This reverses a three-year trend of growth from 2003 to 2005.
Reserves replacement from the drillbit, excluding revisions, dropped to 183% in 2006 from 192% in 2005.
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