As new energy sources continue to get harder to find, many of the major integrated oil firms have been unveiling mammoth-sized capital expenditure budgets.
Back in December, Chevron (NYSE:CVX) set the bar for the large oil firms, when it announced its 2012 capex budget would be around $32.7 billion. Likewise, Royal Dutch Shell (NYSE:RDS.A,RDS.B) revealed that it will spend a similar high amount. All across the E&P spectrum, a variety of firms have been upping their budgets as the hunt for oil continues to get more and more expensive.
However, the king of the capex hill has to be Exxon Mobil (NYSE:XOM). With the giant predicting that overall energy demand will rise 30% by 2040, it recently set forth its five-year budget at an unprecedented $185 billion. That’s a 29% increase versus the previous five-year period.
Given the planet’s new energy reality, this sort of high spending certainly is justified and ultimately will benefit the oil firm and its shareholders over the long term. Nevertheless, Exxon shareholders won’t be the only ones to see gains from huge increase in spending. After all, the integrated company will need to hire out all sorts of subcontractors and dole out these funds accordingly. For investors, adding these various service firms could be just as profitable as adding the integrated oils themselves.
Overall, Exxon’s plans tap some unique resources like Africa, Papua New Guinea and North American shale formations with its latest capital expenditure budget. About $150 billion of its future spending will go toward these exploration efforts. The remaining $35 billion is earmarked for upgrading its global refining and chemical operations. This includes major initiatives in emerging Asia, such as a massive expansion at a Singapore chemicals facility and a new refinery in Thailand. While these facility upgrades might excite shareholders in companies like Foster Wheeler (NASDAQ:FWLT), its E&P efforts are what gets my blood pumping.
Exxon’s upgraded capital expenditure program would cover 21 major oil and gas projects currently in development and would add just more than 1 million net barrels of oil equivalent per day by 2016. Getting that amount of production out of the ground takes some serious equipment. This is exactly why investors should consider adding the oil service industry to a portfolio. As Exxon and the rest of the E&P sector continue to delve into more unconventional fields like Canada’s rich bitumen oil sands or Kenya’s hard shale formations, the task will fall to the service firms to provide the muscle required to drill in these places.
What’s more bullish for the oil services firms is the fact that oil and gas production has been dwindling despite these spending amounts. The explorers are finding it harder to maintain a sound production growth profile, given the challenges with these sorts of new fields. A variety of majors including BP (NYSE:BP) recently have announced struggling production growth and reported producing less oil last year. Exxon predicts its own production could fall by 3% this year when compared with 2011’s numbers. This underscores one of the major problems the E&P firms are having: spending a ton while only receiving only marginal benefits.