With all that's going on in our world these days, you may not have noticed that the costs the oil and gas producers are paying for their projects are being ratcheted up. And beyond that, those costs likely will continue higher, as projects canceled last year are brought back on stream in 2010 and beyond. It also could be just the reason you should pay more attention to oilfield services.
Take BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A); both companies had set their sights on additional cost-cutting, following a strong effort in 2009 when BP in particular was able to shave $4 billion from its expenses. Shell's target was a reduction of about $1 billion this year, but it appears doubtful that the two producers will find savings as easy to come by in 2010.
With crude oil prices edging upward toward $80 a barrel, more than double last year's low, a number of projects that were shelved in late 2009 are back in the picture. Further, the going rates for engineers and raw materials such as steel are heading higher. The result will make it difficult for the members of Big Oil to proceed on their large or remote projects and raise their production, while trimming costs.
Take the two largest U.S.-based producers, ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX). Exxon, in addition to participating in Chevron's big Gorgon LNG project off the Australian coast, now also finds itself exploring in a number of high-risk -- and consequently high-cost -- areas, from Madagascar to Greenland. In many of the places where the company is operating, a single well can cost more than $100 million. Combined with Gorgon's required cash outlays, Exxon's capital spending could approach the top end of its $25 billion to $30 billion budget.
Similarly, Chevron also has a number of major projects underway. First there's Gorgon, of which it is half owner and operator. The big project is expected to cost at least $37 billion. On the basis of the company's plans for the year, and backing out one-time lease payments, Chevron will probably raise its capital spending by about 5% year over year.
So who benefits most from this trend to higher prices? My quick response is the oilfield services companies, such as Schlumberger (NYSE: SLB) -- which just announced that it is buying Smith International (NYSE: SII) for $11 billion -- and Halliburton (NYSE: HAL). Therefore, as an energy investor, my first move is to focus carefully on this big services pair.
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