S&P Sees ‘Operating Weakness’ In Oil Cos’ Poor Output Growth

HOUSTON -(Dow Jones)- Oil and gas companies face a gap between strong financial performance and “operating weakness” as they fail to significantly grow production despite an increase in commodity prices, according to a note published Thursday by ratings agency Standard & Poor’s.

“It is unclear that producers are investing enough to grow production more than 1% to 2% and several of the major integrated companies have reported very poor reserve replacement rates for 2004,” said the report.

The report stated that many majors and independents had increased their upstream spending by 8% to 10% above 2004 levels. Yet the largest companies in particular have difficulty in increasing their short-term production and reserve base as they move away from their onshore and shallow-water North American properties towards long-term, riskier projects in the deepwater Gulf of Mexico and abroad.

“The shift results in increased risk, as larger, more expensive projects in more challenging operating and political environments become more individually important to companies’ performance,” the report said.

Political instability in Venezuela, West Africa and the countries of the former Soviet Union contributed to S&P’s assessment that risk has increased.

Reserve revisions are likely to remain a concern in coming quarters, as companies tighten their internal reserve reporting controls, according to the note.

S&P expects oil and natural gas prices to remain high in the medium term due to strong global demand and companies’ limited capacity to bring out additional barrels.

-By Angel Gonzalez, Dow Jones Newswires; 713-547-9207; angel.gonzalez@ dowjones.com

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