Cautious 2009 Plans for Energy Companies

In response to rapidly deteriorating pricing, Energy companies are keeping 2009 spending plans largely steady, even as crude oil prices tumbled to a 16-month low.

Executives plan to wait for cues from clients before altering capital budgets because, even if oil prices are half that of three months ago, a $70-a-barrel range still represents a historically healthy level for production.

OPEC's meeting on Friday will be closely watched, although a U.S. fuel inventory build-up indicated weak demand may matter more than any cartel supply cuts.

ConocoPhillips, kicking off third-quarter reporting for big oil companies with good results, said 2009 capital expenditure would be similar to 2008.

"We want to live within our means," Chief Executive Jim Mulva said.

The shares of the third-largest U.S. oil company fell 9 percent, mostly due to the 7 percent fall in oil prices.

Oilfield services company Baker Hughes Inc, on the other hand, missed Wall Street estimates and its shares plunged 22 percent.

Yet Baker Hughes executives told analysts they could maintain capital spending or even raise it depending on how 2009 shapes up, and they would have a clearer view on that in the next month or so as clients set budgets.

Baker Hughes would tighten up hiring practices and reduce money tied up in working capital, which until recently had been of little concern as energy prices regularly topped new records and the industry seemed like it could not grow fast enough.

"The whole industry over the last three years has probably been less focused on inventory and receivables because everybody is growing," Chief Executive Chad Deaton said.

The steady approach of the two Houston-based companies mirrored that of Norway's StatoilHydro, which said cheaper oil was not affecting its projects or spending.

Indeed, much of the world looks in relatively better shape than the U.S. energy production market, where a collapse in natural gas prices in particular threatens marginal projects.

Noble Corp, with rigs in the U.S. Gulf of Mexico, Middle East, Mexico, North Sea, Brazil, West Africa and India, reported a better-than-expected quarterly profit on Wednesday and unrelenting demand for deepwater units.

"Our outlook remains positive for the balance of 2008 and for 2009 and is driven by our unprecedented fleet backlog and the high percentage of committed days under contract for next year," Chief Executive David Williams said in a statement.

But operational health is not the only concern. Russia's gas industry, while enjoying good prices, is being squeezed by a shortage of finance, Gazprom said.

Asked about what projects $70-a-barrel oil will threaten, Deaton at Baker Hughes expected clients in the declining fields in the waters near Britain could feel the impact hardest.

"The UK could be one that we'd have to watch," he said on a conference call with investors. "Fortunately, right now we are extremely busy in Norway ... which is pretty handy to support out of the UK."

The Baker Hughes results follow those of larger rivals Schlumberger Ltd (SLB.N: Quote, Profile, Research, Stock Buzz) and Halliburton Co (HAL.N: Quote, Profile, Research, Stock Buzz) in the past week. Both had strong quarters, but expect slower 2009 growth as clients tighten belts and run fewer rigs in North America.

Baker Hughes expects some 200 rigs to be idled this quarter alone, out of 2,400 operating at the end of September in North America, due to tighter credit and lower energy prices.

But that decline would only put profit margins back where they were in the first quarter of the year, before the industry began increasing the number of rigs in operation.

"The next 200 rigs are the ones that are going to hurt a little bit more," Deaton said.

Another big U.S. oilfield services company, Weatherford International Ltd, forecast this week that a decline of 400 rigs next year would cut North American margins by up to 4.5 percent from its third-quarter level of 26.5 percent.

Author: Jo Amey