High Crude Prices Spur Spending on Exploration & Production (XOM, CVX, RDS-A, BP, PBR)

The price for a barrel of crude has risen about 17% since the beginning of 2010, to near $92/barrel. Positive forecasts for global economic growth, combined with a weaker US dollar are responsible, and the big oil companies appear poised to pump more of their rising revenues back into exploring and producing more of the black gold.

A survey of the industry by Barclays Capital, cited by The Wall Street Journal, indicates that spending will rise by 11% year-over-year in 2011, to a total of $490 billion.  Barclays’ analyst noted that the push to find new fields is based on the belief that the current rise in prices is sustainable.

Big oil companies, including Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), Royal Dutch Shell plc (NYSE: RDS-A), and BP plc (NYSE: BP), are expected to spend $108.6 billion in 2011, a boost of 16% year-over-year. Petroleo Brasileiro SA, or Petrobras, (NYSE: PBR) is planning to spend some $28 billion, most of which will go to developing Brazil’s offshore deepwater fields.

Oil companies are not shying away from deals either. The Financial Times reports that there are more than $90 billion worth of global oil and gas assets on the market right now.  Companies are looking to shed non-core assets. The asset sales are being offered so that companies can raise money to pay for the increase in exploration & production projects and to help boost returns to shareholders.

Shareholder returns have been getting a boost only from share buybacks and dividend increases. Share prices have not risen substantially, causing some investors to view big oil company stocks as not much different from utility stocks.

The FT also reports that Chinese buyers had spent nearly $25 billion on oil and gas acquisitions as of early November 2010.  And China’s acquisitiveness is not expected to diminish in the future, as the country continues to demand more and more energy to feed its growing economy.

The majority of the assets that the large companies have for sale are likely to go to smaller companies because the assets are already producing and don’t require a lot of capital investment to generate revenue.

For US consumers, the long-term effects of increased investment now could have a moderating influence on prices in the future. That means that instead of paying $10/gallon at the pump in 2016, we might have to pay only $8/gallon. Yippee.

Paul Ausick