Boosting capex is key as majors chase production barrels

Royal Dutch Shell’s announcement this morning that it is selling its holding in six oil and gas fields in the Gulf of Mexico is by no means a signal that the Anglo-Dutch major is about to reduce its presence in the area. The company is doing what most of its peers have been doing - selling non-core assets and focusing on higher-quality ones.

At the same time, most of the supermajors are also increasing their capital expenditure budgets in an attempt to increase production growth – one of the themes to come out of the third quarter reporting season that just ended which saw Exxon and Shell report sharply higher profits, fuelled by strong crude prices and better refining margins.

Even BP, which has been hard hit by the accident in the Gulf of Mexico, said in its third quarter results that given the strength of its underlying cash flows and “the investment opportunities available to us”, its 2011 capex is under review and “is expected to exceed the $18bn previously indicated”.

Analysts at Evolution Securities, in a note this morning, had this to say about Shell’s deal:

“…we suspect we’re about to see an increase in capex budgets as big oil decides to sanction more projects. Even BP after Macondo [the ruptured well in the Gulf of Mexico] is looking to increase capex next year not because of inflation (although it’s bound to become a factor) but to accelerate new investments. We suspect Big Oil will be tempted to keep recycling cash from non-core operations into exploration and new projects. The more aggressive they are in pursuing in this strategy the better it may be for shareholders.”

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