The 100 largest public domestic oil and gas companies spent a whopping $277.8 billion in exploration and production spending in 2010, a significant increase from the 2009 level of $153 billon and even higher than the previous peak of $221.5 billion in 2008, according to a Global Hunter Securities study that examined industry trends and investment successes.

The study, which was released in late June, analyzed reserve statistics over one-, three- and five-year periods. The results reveal an upward trend for drillbit and acquisition costs on absolute and per-unit bases. Future production and development costs per unit also experienced a substantial increase year-over-year.

Regarding spending, lead analyst Michael Bodino said, "Eliminating acquisitions, 2010 drilling expenditures of $158 billion were just below 2008 drilling expenditures of $165.5 billion. Keep in mind that ExxonMobil's $41-billion purchase of XTO Energy was a sizeable portion of the uptick in overall expenditures."

The higher costs to find and develop reserves may be due to a shift to liquids and a push for oil reserves, the study suggests, adding that increased commodity prices will be required to generate like economic returns in the future.

The companies in the study, on average, have a 12.1-year reserve life and produced 63 billion cubic feet per day of natural gas and 10 million barrels per day of oil in 2010.

Currently, "companies engaged in petroleum exploration tend to have higher valuations even though oil pursuits are more expensive," said Bodino. Oil-weighted companies had an average valuation of $36.16 per barrel of oil equivalent (BOE) while gas-weighted names had an average valuation of $21.51 per BOE. Furthermore, the highest valued oil-weighted names were mostly companies with a focus on the Bakken.

Global Hunter's survey data include more than 308 trillion cubic feet of natural gas reserves, about 40 billion barrels of oil reserves or $91.2 billion BOE. The study employed the Securities and Exchange Commission's after-tax PV-10 estimations to determine 2010 pricing, which on average was $75.38 per barrel for West Texas Intermediate and $4.43 per thousand cubic feet for the Henry Hub.

In examining the earnings of the 100 companies, Ultra Petroleum Corp. (NYSE: UPL), an independent exploration and production company, earned the distinction of being ranked as the top publicly held investment among exploration and production companies during a decade-long period from 2001 through 2010. Meanwhile, Northern Oil and Gas Inc. (NYSE: NOG) and Concho Resources Inc. (NYSE: CXO) shared honors as having the top investment return for a five-year period from 2006 through 2010.

"Companies that are the most attractive have significant sequential growth in reserves and production, projects with scale that provide lower re-investment risk, and high rates of return on every dollar invested in the business. Every company's goal should be to maximize its cash flow on each unit of production (financial management) and to maximize its present value per dollar invested (operations management)," said Bodino.

For the 10 years from 2001 to 2010, Ultra Petroleum had an investment return of 3,085%, followed by Southwest Energy Co. (NYSE: SWN), 2,770%; Contango Oil & Gas Co. (AMEX: MCF), 2,103%; GeoResources Inc. (Nasdaq: GEOI) 994%; and Occidental Petroleum Corp. (NYSE: OXY), 918%. Coming in at sixth through 10th, respectively, were Magnum Hunter Resources Corp. (NYSE: MHR), 914%; Range Resources Corp. (NYSE: RRC), 905%; Panhandle Oil and Gas Inc. (NYSE: PHX), 806%; Berry Petroleum Co. (NYSE: BRY), 674%; and Whiting Petroleum Corp. (NYSE: WLL), 620%.

In the five-year period from 2006 to 2010, Northern Oil and Gas and Concho Resources each had an investment return of 580%. Rounding out the Top 10 were Contago Oil and Gas, 410%; Miller Petroleum Inc. (NYSE: MILL), 319%; Continental Resources Inc. (NYSE: CLR), 317%; EV Energy Partners LP (Nasdaq: EVEP), 195%; Whiting Petroleum, 193%; GeoResources, 174%; Occidental, 168%; and Linn Energy LLC (Nasdaq: LINE), 166%.

According to Global Hunter, key industry trends in recent years among the 100 include:

  • The companies’ finding and development (F&D) costs increased through 2008 to $29.17 per BOE, only to fall to $13.02 per BOE in 2009. In 2010, F&D costs climbed to $18.27 per BOE, which was similar to the 2006 level of $18.32 PER BOE. The top five companies with the lowest drillbit F&D cost per BOE in 2010 were NGAS Resources Inc. (NYSE: NGAS), $1.08; Panhandle Oil and Gas, $1.82; EQT Corp. (NYSE: EQT), $2.81; EXCO Resources Inc. (NYSE: XCO) $3.22; and Carrizo Oil and Gas Inc. (Nasdaq: CRZO), $3.55.
  • Acquisition F&D costs, which were driven by land purchases and mergers and acquisitions (M&A), reached $44.40 per BOE in 2008 and fell to $27.98 per BOE in 2009, and further declining to $24.96 per BOE in 2010.
  • All sources of F&D costs, which were driven by rising drilling costs, peaked at $25.92 per BOE in 2008, only to dive to $12.18 per BOE in 2009. In 2010, it rose to $17.05 per BOE, slightly higher than 2006 per BOE figure of $16.76. For 2010, the top five companies with the lowest all-sources F&D costs per BOE were Panhandle Oil and Gas, $1.35; PostRock Energy Corp. (Nasdaq: PSTR), $1.91; Range Resources, $3.67; Double Eagle Petroleum Co. (Nasdaq: DBLE), $4.04; and Crimson Exploration Inc. (NYSE: CXPO), $4.08.
  • In aggregate, the companies generated operating cash flow of $29.12 per BOE in 2010. That was up from the $24.81 in 2009, but down from the 2008 figure of $40.32.
  • The companies replaced 171% of production in 2010, compared with 204% in 2009.
  • From a reserve standpoint, future production costs rose from $11.61 per BOE in 2008 to $14.39 per BOE in 2009, and even more in 2010 to $15.83 per BOE. The study indicated that the increases may be due to a shift to liquids and a push for oil reserves, which, on average, are more costly to produce. The companies with the lowest production cost per BOE were EQT Corp., $3.81; Contango Oil & Gas, $4.44; Cabot Oil & Gas Corp. (NYSE: COG), $5.28; and NGAS Resources Inc., $5.70.
  • Future development costs rose from $10.08 per BOE in 2006 to $15.74 per BOE in 2010. The companies with the lowest future development cost per BOE were EV Energy Partners, $2.46; Double Eagle Petroleum, $5.06; Miller Petroleum, $5.48; EQT Corp., $5.58; and Cimarex Energy Co., (NYSE: XEC), $6.06.

The full, 166-page Global Hunter report is available as a PDF file.

Contact the author, Mike Madere, at mmadere@hartenergy.com.