presents

April 11 & 12, 2000

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MORE MERGERS AND ACQUISITIONS AHEAD?
Over half the respondents to the Andersen survey thought that E&P merger and acquisition activity will increase this year.

A full half of respondents thought the employment picture for the industry would improve over last year, most saying that they expected to increase E&P hiring. About 40% said they were suffering from a shortage of experienced workers.

As for the hardware for drilling, the Andersen survey said that the companies' outlook was for a U.S. median of 800 active rigs this year, with a majority believing there will be no shortage of offshore or onshore drilling rigs.

From the numbers reported by Salomon Smith Barney, the increase in North American independent E&P capital spending forecast for this year marks a turnaround. Following a decline of more than 18% in 1999, worldwide E&P spending is expected to jump to the plus side by over 11%. The Salomon survey showed that U.S. independents are forecast to increase their spending by more than 15%. This was less than some expected from the indies, but includes an increase of more than 26% by companies with budgets less than $200 million.

International spending seems to be on hold for now for the independents. "It will be very limited internationally," said Jim Wicklund of Dain Rauscher. "We think that domestically indies will increase spending by 17% to 18%, and in Canada by 25%. Most of it will be for gas, and more for the offshore than we've seen for a while."

Independents are accelerating their take-over of the shallow-water U.S. Gulf.
Lewis Ropp of Frost Securities says that capital plans for the independents are hedged a bit. "My expectation would be that people have left themselves some room to be able to add some projects later in the year if these commodity prices hold. They have budgeted on a much lower price deck than what we are seeing in the strips. There's probably not a clear understanding at this point what the activity levels could be in the second half of the year."

The Salomon survey showed that the average oil price assumption by the independents for 2000 is $19.08 per barrel (West Texas Intermediate), compared to $14.67 last year. The oil futures strip is currently more than $22. Gas price assumptions have risen to $2.41 per Mcf (Henry Hub) from $2.18, but the strip shows $2.70.

The Salomon survey also revealed that the E&Ps' sensitivity to changes in oil and gas prices are much lower than last year. Only one-third of respondents would increase spending at $3 higher oil prices and only one-half would reduce spending at $3 lower prices. Last year the figures were 70% and 85%, respectively. Sensitivity to gas prices is slightly higher, but down sharply from last year.

VASTAR PLANS 28% INCREASE
IN SPENDING
Vastar Resources has said it plans to spend $850 million this year, up 28% from last year, the bulk going to U.S. Gulf development. About 54% of the budget, $460 million, has been allocated for working currently-owned fields through drilling, recompletions, and installing or upgrading surface facilities. Vastar said it is particularly keen on developing the 23 offshore properties it acquired from Mobil in 1998, citing hundreds of identified opportunities.

"In the case of Vastar," said Ropp, "they've made some significant discoveries and have made a lot of claims about their size and the impact they are going to have. Obviously, at some point you've got to start pulling oil out of the ground to back that up."
Vastar has slated about 32% of the budget, $270 million, for exploration in the Gulf. It plans to participate in four to six deepwater wells and some 40 shelf exploratory and extension wells. The remaining 14% of the bundle, $120 million, will be held for acquisition opportunities.

Ocean Energy has earmarked about $500 million in capex for 2000, up 40% from last year. Half the budget is headed to the Gulf, divided equally between deepwater and shelf drilling. Exploration activities comprise 35% of the total.

Ropp said Ocean's plans are a little bit different from Vastar's. "They had curtailed their capital spending to a great extent last year when they were cleaning up their balance sheet. A lot of the work they have is a hold-over from last year. Also, they've got this large discovery in the Gulf with Kerr-McGee that's going to require extensive development drilling because of the geology."

All of this is much-needed music to service company ears...

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