Barclays forecasts 2009 e&p spending

HOUSTON, October 14, 2008 —Barclays Capital estimates that North American exploration and production (E&P) spending will drop by 15 percent in 2009 versus 2008 levels, while international E&P spending will rise by 20 percent in 2009.

Barclays analysts James D. Crandell and James C. West had previously anticipated spending to increase in North America next year; however, lower natural gas prices due to supply growth, announced budget cuts, pressure on cash flows, credit market issues, and concerns about demand growth have led us to revise our forecast.

Barclays also has reduced its forecasts for oil and gas prices in 2009 to US$75/bbl and US$7/Mcf from its previous forecasts of US$90/bbl for oil and US$8.50/Mcf for gas.

"Based on our revised forecasts for commodity prices and North American E&P spending, we have reduced our earnings estimates for many oil service and drilling companies - particularly those that are oriented toward the North American natural gas market.

"The largest changes are for the land drillers and domestic pressure pumping companies. Our international and offshore estimates are mostly unchanged."

Land rig contractors and pressure pumping companies are sectors of the North American energy business that will probably experience the most difficult conditions, Barclays said.

Despite the downward revision for North American E&P spending, the new oil price forecast remains above threshold pricing for most international onshore and offshore projects, and Barclays expects continued strong growth for international E&P expenditures in 2009.

Barclays also is still maintaining its positive outlook on the oil service and drilling sector, saying that oil service and drilling stocks are "attractive investments even given our outlook of lower oil and natural gas prices."

"We believe share prices of many oil service and drilling stocks reflect a far more negative scenario than what we forecast. While we would not rule out more challenging conditions, it is not the most likely scenario in our judgment.

"Given this disconnect we believe the shares are attractively prices and we recommend buying oil service stocks at these levels," Barclays said.

The decline in E&P spending in North America also is expected to cause a drop in the rig count of about 400 rigs from today's levels. "We anticipate a flattish rig count into mid-December and a steeper than average seasonal decline in early 2009. Under our current scenario we would expect the rig count to bottom around mid-year."

"Current market conditions in North America are robust and most oil service companies will report strong North American results for the third quarter, excluding the impact of Hurricanes Gustav and Ike. We expect conditions to deteriorate as the rig count falls. Pricing gains which have recently occurred will most likely reverse and margins will be under pressure."