A Comprehensive Review of the E&Ps in 2007
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E&P Stocks Outperform in 2007: E&P shares gained 26% on average in 2007
(vs. +4% for the S&P 500), a sharp improvement from the 2% average loss in
2006 (vs. +14% for the S&P 500). The strong share performance was supported
by margin expansion (higher commodity prices were only partially offset by rising
costs) along with robust reserve and production growth. Unit reserve valuations
averaged $3.14 per Mcfe, down 2% compared with $3.21 per Mcfe in 2006.
Meanwhile, on EV-to-EBITDA, valuations held flat in 2007 (vs. 2006) at 6.3x.
With the group up 30% YTD on rising commodity prices, we estimate the E&Ps
are currently trading at $3.98 per Mcfe on 2007 reserves and 5.3x on 2008
EBITDA (on Strip prices).
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Rig Additions Slow in 2007 Given Improved Efficiency: During 2007, the
total U.S. rig count rose 7% on average (to 1,768 rigs), well below the 19% rig
count increase seen in 2006. Despite a slower pace of rig additions, U.S. gas
production growth was actually stronger in 2007 (+3.7% yr/yr in 2007 vs. +3.0%
yr/yr in 2006) as companies benefited from improved rig efficiency (e.g. fit-forpurpose
new build land rigs), which reduced drilling times in unconventional gas
plays by about one-third. Also, improved horizontal completion processes have
led to rising reserves and production per well (particularly in shale plays).
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Drill Bit F&D Costs (Ex-Revisions) Rise 8% to $3.05 per Mcfe: Worldwide
organic F&D costs (ex revisions) for the E&Ps rose 8% yr/yr to $3.05 per Mcfe
marking the ninth consecutive increase since 1999. However, it appears F&D
cost inflation is starting to ease, with drill-bit F&D cost inflation of 8% in 2007,
below the yr/yr increases of 18% in 2006, 40% in 2005 and 11% in 2004. When
including reserve revisions, drill-bit F&D averaged $2.42 per Mcfe (-16% yr/yr).
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Organic Reserve Replacement Soars in 2007: Given high reinvestment rates
and moderating F&D costs, median reserve replacement through the drill-bit rose
to a record high 226% in 2007 (vs. 175% in 2006). When excluding reserve
revisions, organic reserve replacement totaled 190% in 2007 (vs. 179% in 2006).
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All-In F&D Costs Fall to $2.80 per Mcfe In 2007: On an all-in basis (including
acquisitions and revisions), worldwide F&D costs fell 9% yr/yr to $2.80 per Mcfe
marking the first year-over-year decline for this metric since 2002. In North
America, all-in F&D costs averaged $2.79 per Mcfe (-12% yr/yr). Positive reserve
revisions have helped improve all-in F&D metrics, with reserve revisions (both
performance and price-related) measuring +2% of total reserves in 2007 versus -
2% in 2006, -1% in 2005 and -1% in 2004.