Some Independent Oil Companies Are Screwing Up
By Matt Badiali
March 20, 2007
Swift Energy (SFY) is bailing out of New Zealand's Taranaki Basin.
The $1 billion oil and gas producer just announced a 28% cut in this year's capital budget… and 95% of the money will cover easy targets in North America.
That leaves a pittance for the company's work in New Zealand, one of its most promising regions for new oil and gas.
I think it's a huge mistake.
Swift's actions are part of a disturbing trend developing in oil and gas exploration companies right now. They are cutting their capital budgets and becoming homebodies. They are throttling back on exploration and going for the easy stuff.
These companies are reacting to falling oil prices and the rising cost of supplies: things like fuel (ironically), steel pipe, and drill rigs. Normally, I'd be in favor of limiting frivolous spending. However, many of these companies are staying busy by drilling up their proven, undeveloped reserves (PUDs).
PUDs are oil and gas reserves that are in a working field or adjacent to pumping wells, and they're easy to drill without much risk.
Pioneer Natural Resources (PXD), for example, cut its 2007 capital budget by 18%... and 80% of that new budget is aimed at onshore U.S. That leaves about $200 million split between fields in Tunisia and South Africa.
From a long-term investor's standpoint, I'm not in favor of that kind of response. Lower oil and gas prices should drive producers to focus on expanding new areas, rather than drilling and pumping the easy stuff.
I'm afraid these middle-of-the-road exploration companies are succumbing to the pressure of trying to keep their earnings up and Wall Street happy. In the oil business, that's the dumb path. That is thinking short term when you should be looking down the road.
The majors, to their credit, are taking the long view...
For example, one of my favorite energy companies in the world, ConocoPhillips (COP), has ramped up its spending budget by 33%, exploring aggressively in Russia, the Caspian Sea, the Middle East, and the Asia-Pacific Region.
Chevron (CVX) is also throwing lots of money at exploration. It's spending $19.6 billion in 2007, a huge 20% increase from last year. Here's how the company is allocating its assets:
- 39% to onshore and offshore North America (including its expensive deepwater efforts on Jack)
- 25% in Africa
- 19% in Asia/Pacific
- 7% in the Caspian Sea
- 10% in other places
ExxonMobil (XOM), the best indicator of what oil companies should do, will spend money like crazy to bring on 20 new global projects by 2009. The world's largest company is scheduled to spend $20 billion on finding new oil in 2007, a 5.5% increase from last year. These ambitious efforts are very different from poking holes in a couple of Louisiana parishes like Swift is doing.
I'd put my money on the supermajor oil stocks having another fantastic year in 2007. They're also making the right decisions now to be in far better shape this time next year. And the year after that, and the year after that...
Good investing,
Matt Badiali
