Page 4 - NorthAmOil Week 11

NorthAmOil COMMENTARY NorthAmOil
Wave of US capex cuts accelerates
More and more US oil companies are rapidly cutting back capital expenditure budgets in response to the collapse in oil prices
US
WHAT:
A growing number of US producers are scaling back spending plans for 2020.
WHY:
WTI prices have fallen to around $25 per barrel.
WHAT NEXT:
A rise in layoffs and bankruptcies is expected to follow.
THINGS appear to be going from bad to worse for the global oil industry as crude prices have fallen even further. As of March 18, Brent was hovering around $26 per barrel, while West Texas Intermediate (WTI) had dropped close to $22 per barrel – its lowest level in 18 years. With more and more countries taking drastic, unprecedented action to combat the coronavi- rus (COVID-19) pandemic, collapsing demand is exacerbating the challenges brought about by Saudi Arabia and Russia engaging in what has been described as an oil price war.
Many in the US oil industry have been quick to respond, with the first cuts to capital expendi- ture budgets coming in the days after the OPEC+ talks failed and prices tumbled as Saudi threat- ened to flood global markets with cheap oil. Shale drillers including Diamondback Energy, Parsley Energy and Marathon Oil were among the first US producers to announce that they were scal- ing back activity. (See NorthAmOil Week 10). An ever-growing number have followed in their footsteps, with bigger companies also unveiling plans to cut back drilling and spending.
Growing list
Leading shale drillers Pioneer Natural Resources and EOG Resources both joined the list of oil companies that are cutting their capex this week. Other companies to adopt similar measures include Hess, Noble Energy and Ovintiv – for- merly known as Encana and now redomiciled in the US. ConocoPhillips – the largest inde- pendent producer – has also reduced its capex budget, while super-major ExxonMobil has said it is exploring options to “significantly reduce
capital and operating expenses in the near term”. Pioneer said on March 16 that it was reducing its 2020 drilling, completion and facilities budget by around 45% to $1.6-1.8bn. Additionally, the company said it would cut its budgeted water infrastructure spending to roughly $100mn, resulting in a total capital budget range of $1.7- 1.9bn for this year. The revised budget was based on the assumption that WTI would average $35 per barrel for the remainder of 2020. However, ongoing downward price trends appear to be already testing that assumption, with no relief
in sight.
Permian Basin-focused Pioneer also said
it would reduce its operated rig count from 22 operated rigs to 11 within the next two months. On the same day, EOG said it was reducing
its 2020 capex budget by 31% to $4.3-4.7bn, and was now targeting flat oil production volumes on a year-on-year basis.
“Our first priority is to generate high returns with every dollar we spend even at low oil prices,” EOG’s chairman and CEO, Bill Thomas, said in a statement.
Other companies are also rushing to announce similar measures. Hess is reducing its capex for 2020 by $800mn, or almost 27%, to $2.2bn. The company is somewhat shielded from the immediate impact of the price collapse, as 80% of its production for this year is hedged at $55 per barrel for WTI and $60 per barrel for Brent.
Noble is reducing its 2020 spending by $500mn, or nearly 30%, to $1.1-1.3bn. In an illustration of how this new downturn will hit shale drilling, the company said its US onshore
Source: US Energy Information Administration
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w w w . N E W S B A S E . c o m Week 11 19•March•2020