Ernst & Young finds CAPEX Down but Reserves Up | Russell T. Rudy Energy LLC
A recent article in “Rigzone” cites a study by Ernst & Young which found that while capital expenditures (CAPEX) are falling, oil and gas reserves are rising. The study selected the 50 largest oil and gas companies, based on year-end 2013 reserves, and divided them into three categories: independent, large independent, and integrated.
The decrease in CAPEX is at least partially attributable to a shift from an emphasis on exploration (acreage acquisitions, seismic and wildcat drilling) to development of reserves. This is largely due to pressure from investors to develop and monetize fields discovered as a result of previous exploration. Consequently, in spite of the decrease in capital outlays, oil and gas reserves increased by 9% from year-end 2012 to 2013. Oil production was replaced at a rate of 222% and gas at 229%.
Ernst & Young feels that as a result of strong profits and reserves growth, the industry is becoming more stable. Apparently the oil companies share this optimism as 125% of profits were re-invested in 2013. The study also found that independents and large independents continue to dominate shale plays, with companies like Apache and Continental Resources leading the increase in oil reserves. Not surprisingly, these smaller companies are more nimble and can move quickly to exploit opportunities. Ironically, they also enjoy an edge in economies to scale, thereby reducing their cost on a per barrel equivalent basis. This is partly because the integrated companies are often late to enter unconventional plays, and therefore have smaller acreage positions which were purchased at a premium.
Learning curves also can work in the favor of smaller companies. Initial wells in a new play can be quite expensive, but costs can be driven down for subsequent wells through developing new process. Consequently, as more wells are drilled on larger acreage, average well costs can be significantly reduced. Conversely, the integrated companies often have fewer wells over which to spread their exploration and development costs.
To read the article in its entirety, please go to www.rigzone.com/news/article.asp?hpf=1&a_id=133782&utm .
