Capital Spending Falls Off a Cliff (DVN, SD, ME, HES, EQT)

By Douglas A. McIntyre Updated Apr 27, 6:31PM EDT · Published Dec 17, 11:19AM EST

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Oil_well_image We’ve been following recent announcements of pullbacks in capital spending in the oil and gas patch. Every day it seems, one or two more companies announce that capital spending will be cut by up to 50% from previously announced numbers.

Today’s crop of thrifty companies includes Devon Energy Corporation (NYSE:DVN), SandRidge Energy Inc. (NYSE:SD), and Mariner Energy, Inc. (NYSE:ME). Actually, Devon only announced that it would announce its 2009 capital budget "in early 2009" when it reports earnings for 2008. This is news because the company historically disclosed its spending plans in December for the following year. This development is not unlike Apple’s announcement that Steve Jobs won’t be attending the Macworld this year.

In October, SandRidge said it was reducing its capex budget from $2billion to $1 billion and upping production to 120 billion cubic feetequivalent. Today the company cut its capex budget by 50%, to $500million and reduced its production guidance for 2009 to 110 billioncubic feet equivalent for the year. That’s a big change in just twomonths.

SandRidge has also been trying to sell properties in East Texas, andtoday’s press release notes that the company had "several bids … thatwould have been accepted had there been certainty with respect tocapital availability." So the company has decided to keep theproperties. Now, the company is reducing its rig count from a high of47 in September to just 12 by December 2009.

Mariner plans to disclose its capex and production guidance for 2009after the market closes today. Hess Corporation (NYSE:HES) previouslyrevealed acapex budget of $3.1 billion for 2009, compared with spending of $3.3billion in the first nine months of 2008 against an original budget of$5 billion. Equitable Resources Inc. (NYSE:EQT) has also revealed a capex budgetcut of nearly 40% for 2009.

So far, capex spending levels look like they are headed back to 2002 or2003 levels, when oil prices were in the $20s/barrel. This is not goodfor the oil companies because when demand picks back up, they won’t bein a position to meet it. Another price spike comes along, and thenasty cycle continues.

With the exception of Devon and Hess, these are either small- ormid-cap companies. That’s important because big companies need bigprojects to invest in. There are no big projects around. Either they’retied up by national oil companies or they cost a fortune, which eventhe biggies aren’t going to spend now.

But smaller companies usually can find projects that provide a decentreturn on a much smaller investment. If SandRidge and Mariner arepulling in, its not because the projects aren’t there. It’s thefinancing. The companies can’t finance new spending strictly from cashflow; they need credit. There’s no credit available at a reasonableprice, so they hold on to as much cash as they can and hope for animprovement soon.

If OPEC’s 4+ million barrel per day cut doesn’t drive oil higher, then capex cuts may become more and more frequent.

Paul Ausick
December 17, 2008

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.