Oil and gas – hey big spenders

Where would the world be without the oil and gas industry? After spending $600bn on exploration and production in 2012, the sector is set to spend almost $650bn in 2013, according to Barclays. That should secure a lot of jobs, create a bonanza of subcontracting, bring some of the outstanding projects a little closer to completion, and – who knows? – help in finding a few new wells. Whether it will improve the investment case for E&P companies is another thing.

Returns from the E&P sector in 2012 have been poor. The S&P 500 oil and gas producers index has underperformed the wider US market by 10 percentage points this year; in Europe, a similar comparison shows a 20 per cent shortfall. The sector appears to lack operational momentum: production problems have been widespread and companies have expended much effort shedding peripheral elements of their portfolios. ConocoPhillips’ sale of its Algerian business to Indonesia’s Pertamina for $1.75bn this month is a case in point.

The spending is likely to proceed in spite of oil price fluctuations – though prices remain favourable for the moment. Brent crude trades at about $109 a barrel and West Texas Intermediate at $88, both above industry budget ranges of $75 to $90/b. Barclays says that there is a significant correlation between E&P spending and the oil price that is encouraging a pick-up in exploration activity, which has seen only modest success in 2012. The top spenders are the supermajors. The ones to watch, though, are the so-called national oil companies. Brazil’s Petrobras looks to be choking on its $237bn capital programme. Mexico’s Pemex has been a long-time laggard that may begin spending seriously again. Asia’s NOCs are joining the trend.

There is, unfortunately, little correlation between the size of a company’s capex budget and the size of its shareholder returns. That is unlikely to change in 2013.

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