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NorthAmOil COMMENTARY NorthAmOil
business would account for 80% of its capex reduction, with more than half of the cut com- ing in the Permian’s Delaware sub-basin. Inter- nationally, the company identified $100mn in capex reductions that would come from major project execution.
Ovintiv, for its part, announced plans to immediately reduce capex for the second quar- ter of 2020 by $300mn and full-year cash costs by $100mn. Further cuts may come later in the year, according to the company, which is also immediately dropping 10 operated rigs, with an additional six due to be cut in May 2020. This will account for roughly two-thirds of its oper- ated rigs, and following these reductions, Ovin- tiv will have three operated rigs in the Permian, two in the Anadarko Basin and two in Canada’s Montney shale play.
ConocoPhillips is cutting its capex budget by around $700mn, which accounts for a 10% decrease from previous guidance.
“The reduction will be sourced by slowing operated development activity in the Lower 48, expected decreases in non-operated activity in the Lower 48, and deferred drilling in Alaska,” ConocoPhillips said in a March 18 statement. The company anticipates its production guid- ance for 2020 being reduced by around 20,000 barrels of oil equivalent per day (boepd) as a result of these actions.
What next?
The combined capex cuts are accumulating fast. A note from Morgan Stanley on March 16 esti- mated that across US exploration and produc- tion firms, median cash flow is falling by 40-45% and 2020 capex by 28% – with a 30% decline in total spending for the year.
Morgan Stanley analyst Devin McDermott forecasts a median 8% decline in oil production between the fourth quarter of 2019 and the same quarter of 2020, with declines skewed towards
the second half of this year. He anticipates cer- tain companies being more resilient in this increasingly challenging market. These include integrated companies such as Chevron and ExxonMobil, some diversified firms including ConocoPhillips, Noble, Hess and Devon Energy, and some Permian producers such as Concho Resources, Parsley and Cimarex Energy.
On the other hand, he expects a number of companies including Occidental Petroleum, Continental Resources, Apache and Murphy Oil to be more “challenged”. McDermott has also identified Chesapeake Energy, Whiting Petro- leum, Callon Petroleum and Oasis Petroleum as being at risk of potentially breaching covenants.
Pioneer’s CEO, Scott Sheffield, warned last week that the US could lose 2.0-2.5mn barrels per day (bpd) of output by the end of 2021 if oil prices stayed around current levels as companies go into “maintenance mode”. However, the price levels he was referring to were in the $30-35 per barrel range for WTI and prices have already fallen further since then.
Consultancy Rystad Energy said on March 18 that it had made a “shocking” revision to its forecast since a week ago, and now expected a decrease in global oil demand of 2.8%, or 2.8mn bpd, y/y as a result of the coronavirus pandemic. Separately, the consultancy warned that up to 3mn bpd of extra crude could flood the market from April – 2mn bpd from OPEC+ countries and a potential further 1mn bpd if there is a ceasefire in Libya and the country’s production returns to pre-shut-in levels.
None of this bodes well for the oil price. (See next story) Goldman Sachs has cut its forecasts twice in recent weeks and now thinks Brent could fall to $20 per barrel. Meanwhile, Mizuho has warned that the OPEC+ battle could lead to negative prices. In this market, more capex cuts – and more layoffs and bankruptcies – are all but guaranteed.™
US producers are announcing immediate plans to cut active rig counts.
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