While producers were awash with cash and spent increasing amounts to acquire proved reserves, they were not as anxious to find and develop oil and gas themselves, Arthur Andersen & Co. reports in its "Global E&P Trends 2000," a look at 163 publicly traded companies. The studied companies each have proved reserves of more than 5 million barrels of oil equivalent, and account for 86% of total U.S. liquids reserves and 64% of gas reserves. Worldwide revenues from production jumped 25% in 1999 to $149 billion, an almost complete turnaround from 1998's 24% drop. U.S. production revenues increased 16% to $47 billion. Worldwide, after-tax profits hit more than $33 billion, a vast improvement over 1998's $4.5 billion. U.S. profits totaled $10.2 billion, up from a $410-million loss in 1998. Reserve replacement costs decreased 24% to $4.26 per barrel of oil equivalent worldwide, and fell 45% to $4.99 in the U.S., the first time below $5 in the U.S. since 1995. Finding and development costs, excluding revisions, fell 23% to $6.27 worldwide, and dropped 34% to $6.49 in the U.S. Proved reserve acquisition costs declined 14% to $3.61 worldwide, and dropped 4% to $4.47 in the U.S. But despite the financial recovery, upstream companies shied away from spending their capital in 1999. Worldwide capital outlays declined 5% to $92 billion. In the U.S., they dropped 29% to $25 billion. Exploration and development spending worldwide fell 22% to $62 billion. Exploration took a particularly heavy hit, dropping by one-third to just over $13 billion. In the U.S., exploration spending fell by a third and development spending fell about 25%. The one exception to the spending trend was in worldwide proved property acquisitions, which rocketed 72% worldwide to more than $30 billion-the highest figure seen in the last five years. Meanwhile, that category was just about flat in the U.S., $7.6 billion. Worldwide, oil production replacement, excluding revisions, rose to 92% in 1999 from 86% in 1998; however, gas production replacement declined to 98%, the lowest in five years. In the U.S., oil production replacement declined to 69%, also a five-year low; gas production replacement dropped to 88%, from 96% in 1998. All of these factors point to a major challenge for producers, maintains Victor A. Burk, managing director, Arthur Andersen energy practices. "While oil and natural gas prices have recovered and are at their combined highest level in history, exploration and development spending has not recovered at the same rate, and E&P company stock prices have lagged the price recovery by even more," he says. "As a consequence, many E&P companies find themselves struggling to convince investors they can create value during a time of strong product prices and cash flow. If E&P companies cannot create value in the marketplace with oil prices at $30 per barrel and natural gas at $4 per MMBtu, how will they create value when prices decline?" What E&P companies need to do is to go beyond their physical assets and identify intangibles that could potentially add value to their company, he adds. For example, good relationships with suppliers, foreign governments and project partners all could be assets that add value. Organizational assets such as strategy and vision also should not be overlooked. "E&P companies must find ways to create and realize value in all their assets-the value that may not currently be recognized in their employees, their customers and their supplier relationships." Burk acknowledges that this may not be easy for producers. The best place to start is inward, with the company's strengths and weaknesses. "First, understand your assets." Pinpoint which assets create value, which destroy value and which are neutral. "Then, have a strategy to divest what doesn't create value, and redeploy proceeds into what does." -Jodi Wetuski