22-11-02 Oil and gas exploration and production companies are planning 2003 capital expenditure budgets that are flat or lower than their 2002 budgets amid concerns about volatile commodity prices, Wall Street's expectations, and the economy in general. "We are in a very strange period right now. Commodity prices are high, very good.… Companies should be booming, and mergers and acquisitions should be at a high. Well, equities aren't booming, so companies are cautious," Rick Roberge, leader of the PricewaterhouseCoopers' oil and gas transaction services group in Houston told.
"A lot of companies don't even have plans in 2003 to spend their cash flow. They are going to spend less than their cash flow, meaning they are going to pay down some debt to make the balance sheet look better," Roberge said.

Executives from ConocoPhillips and Unocal confirmed Roberge's industry outlook. Speaking to a group of analysts in New York, ConocoPhillips CEO Jim Mulva said the company plans to reduce capital spending 25% compared with the stand-alone capital programs of the previous two companies. Conoco, Houston, and Phillips Petroleum, Bartlesville, Oklahoma, completed their $ 15 bn merger into the third largest US-based integrated oil firm on Aug. 30.
ConocoPhillips plans to improve its return on capital employed to 12-14 % during the next several years, he said. The strategy also calls for ConocoPhillips to cut its debt-to-capital ratio to 34 % by 2004 compared with a current ration of 39 %. The goal is to reduce debt while growing equity.

Mulva said the company's strategy also involves rationalizing up to $ 4 bn of lower returning assets and increasing the post-merger cost savings/year target to $ 1.25 bn from $ 750 mm.
"We will use a disciplined approach to improve returns for our shareholders," Mulva said. "In addition to the increased post-merger cost savings and asset rationalization, 75 % of our 2003 capital budget will be dedicated to growing our upstream business, which has historically provided higher returns."

ConocoPhillips plans to grow the ratio of its upstream business to its total asset base to 65 % from 57 %. Its emphasis will be on "very large oil and gas developments that can generate significant revenues over long period at competitive operating costs," a release said.
Regarding downstream operations, ConocoPhillips said it will focus on improved returns by providing reliable operations with a low-cost structure, rationalizing assets, executing clean fuels projects, and capitalizing on proprietary technologies.

Unocal expects to keep its overall capital spending in 2003 about even with the 2002 level of $ 1.7 bn, its top executive told analysts.
"We see a ramp-up of spending on large, high-impact development projects while reducing spending on the smaller scale development and exploitation projects," Charles R. Williamson, Unocal chairman and CEO said. Unocal plans to maintain or reduce exploration capital spending, he added. Capital spending for large development projects, including deepwater in Indonesia and the Gulf of Mexico, along with the Caspian region development and pipeline is expected to reach $ 700 mm next year, up from $ 430 mm.
Unocal will reduce other 2003 E&P development capital to $ 600 mm compared with $ 815 mm in 2002. Unocal has forecast exploration capital spending in 2003 at $ 300 mm, down from an expected $ 370 mm this year.