What, exactly, can $723 billion get you anyways? You could almost buy every single piece of property in Manhattan. Or you could fund capital expenditures of the energy industry for just this year. According to a recent report by Barclays, the entire industry will spend $723 billion on development this year alone, a 6.1% jump on this year's record-breaking pace. What is even more surprising about that figure, though, is that the largest companies in the space such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) plan on spending less over the next few years. If the biggest players in the industry are winding down spending but total spending expects to increase, then which companies are stepping up to fill that gap? Let's take a look at some of the new big spenders and what this may mean for energy investments.
"Go ahead, I'm going to take a breather for this round"
Over the past half decade or so, integrated majors have inhaled capital for development faster than Cookie Monster could. To understand why these companies were willing to spend so much money, we need to remember what the climate was four or five years ago. Themes like peak oil were in vogue and fears of oil prices climbing past $150 made even the most expensive projects seem like having a personal ATM. Unfortunately for them, the emergence of shale oil and gas in the U.S., increased offshore activity in the Golden Triangle -- a region bounded by the Gulf of Mexico, West coast of Sub-Saharan Africa, and Brazil -- and decreasing demand in developed nations have brought oil prices back to more sane levels. By the time these events occurred, companies like Chevron and Exxon had already poured big bucks into major projects, and cutting bait on these projects wasn't the best option, either.
So now that many of these projects are finishing the development phase and coming online, companies do not see the impetus to invest in as many major projects for a while. Chevron has announced its 2014 capital budget at $39.8 billion, which is about $2 billion less than this years estimated total. Also, Exxon, Royal Dutch Shell (NYSE: RDS-A), and Total (NYSE:TOT) have all said on recent conference calls and press releases that this year will be the largest in terms of capital spending for the next few years as they start to cash in on those projects.
"C" is for capital, that's good enough for me
Despite the slowdown in integrated major spending, it appears that other companies will be more than willing to cover for it. Some of the largest increases are coming from companies that are investing in North America. Some of the larger players like ConocoPhillips (NYSE:COP) expects to concentrate more of its record $16.7 billion on North America than it has in the past, but its overall budget will only be about 6% higher than it was last year.
Some of the biggest surprises that will catch many people off-guard are the smaller players in the space making much bigger leaps in capital spending. A great example of this is Ultra Petroleum (NASDAQ:UPL) in 2013, when the company is slated to spend about $385 million excluding its acquisition in the Uinta basin. In 2014, though, the company expects to spend about 45% more on exploration and development.
Although Ultra may be a standout case because it is expanding into oil production, don't be surprised if more natural gas producers start to ramp up spending this year as well. One reason we may start to see these companies start to ramp up operations is because the demand for natural gas is expected to jump significantly in 2015 and beyond thanks to LNG export facilities starting to come online. The facilities that have been approved for non-free trade agreement exports have the capacity to move 7.7 billion cubic feet of natural gas per day once fully operational. This represents about 13% of current natural gas consumption in the U.S., according to the U.S. Energy Information Administration. To meet current demand as well as the increase from LNG exports, producers like Ultra and natural gas pipeline companies will need to start ramping up spending now.
What a Fool believes
The question for investors is what would be the better investment in the coming year. Companies like Ultra and Conoco will more than likely see an uptick in production because most of their capital expenditures will be in low-hanging fruit like onshore U.S. wells that start generating a return pretty quickly. At the same time, they are pouring more cash back into the business, so earnings may not be quite as spectacular. On the other side of the coin, the integrated majors will have lots of big projects coming online either this coming year or next, and lowered capital spending could leave more room for more shareholder-friendly moves such as share buybacks and dividend increases. So in the short term, integrated majors may perform better, but they will eventually have to pour money back into the business again as older projects decline further.
The Motley Fool recommends Chevron and Total (ADR). It recommends and owns shares of Ultra Petroleum and has the following options: long January 2014 $30 calls on Ultra Petroleum, long January 2014 $40 calls on Ultra Petroleum, and long January 2014 $50 calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.