Frost fund manager sees 2014 North America energy capex up 10 percent

HOUSTON Tue Nov 5, 2013 4:48pm EST

HOUSTON (Reuters) - North American energy companies are expected to spend 10 percent more next year as they drill shale wells requiring bigger hydraulic fracturing jobs in order to maximize recovery of oil and gas, a U.S.-based portfolio manager said on Tuesday.

Many energy companies are in the process of finalizing 2014 capital expenditure budgets and most investors and analysts expect budgets to grow, even if there is some debate about just how big the increases will be.

Both large and small oil and gas companies are expected to direct more capital to drilling lower-risk, higher-return oil wells in shale formations that require technologies like horizontal drilling and hydraulic fracturing.

"Our expectation is that you are going to see North American spending easily up over 10 percent next year," Ted Harper, who manages more than $400 million in two funds of Frost Investment Advisors, including one focused on natural resources, told the Reuters Global Commodities Summit.

"Given the skew toward the oil shale and the fact that you are talking about longer laterals and more use of sand and proppant, incrementally your well costs go up," he said in Houston.

To release oil and natural gas from rocks like shale with hydraulic fracturing, or fracking, companies pump liquids mixed with sand or ceramic spheres at very high pressures down wells. That mix cracks the rock and then pries it open, freeing up the hydrocarbons that previously had been trapped.

Horizontal drilling of the well increases the amount of the layer of hydrocarbon-rich rock that can be fracked.

Companies constantly tinker with the way wells are drilled and completed to maximize their investment. Drilling wells to longer lateral lengths while doing more and more frack jobs and adding more sand has led to higher recoveries of oil and gas.

Costs that are expected to rise next year include labor, especially for offshore drillers, and any technology offering from service companies that will improve well productivity, Harper said.

"If it costs you a couple hundred-thousand to get $2 million more out of the well, you'll do it," he said. "The returns are still justified."

On Monday, analysts at energy-focused investment bank Tudor, Pickering Holt & Co said in a note to clients that they expected capital expenditures for U.S. exploration and production companies to rise by 8 to 9 percent.

Earlier on Tuesday, Bernard Duroc-Danner, chief executive of oilfield services company Weatherford (WFT.N), said he also expects more spending next year, but not big gains.

"Overall the numbers will be positive expenditures," Duroc-Danner told analysts on a conference call. "It is not going to be a very big number."

Top holdings in Harper's Natural Resources fund include Anadarko Petroleum Corp (APC.N), Occidental Petroleum Corp (OXY.N) and Schlumberger NV (SLB.N).

Occidental had a showdown with investors this year that led to long-serving Chairman Ray Irani being ousted, and Frost was involved because of the fund's belief that Oxy "overplayed their hand" in the tricky Monterey shale in California while also hanging on to undervalued international assets.

"We were not real fans of how the board was being compensated in light of the fact that the stock performance was pretty anemic," Harper said.

Chief Executive Steve Chazen, a one-time investment banker who Harper said ran Oxy in a "financially savvy manner," is now selling off a stake in the company's Middle East assets and weighing a possible sale of the California division.

As for Schlumberger rival Halliburton (HAL.N), Harper noted its shares were up 5 percent in the past few weeks in anticipation of positive news from its analyst day on Wednesday. He said the stock had long suffered from a stigma of being North American gas-oriented, which was beginning to diminish.

Its exposure to liability over the 2010 Gulf of Mexico spill was another matter. "Halliburton, unlike Schlumberger, right now suffers some attenuated Macondo liability hanging out there," Harper said.

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(Reporting by Anna Driver, Braden Reddall and Eileen O'Grady; Editing by Terry Wade and Phil Berlowitz)

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