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Oil Companies Scale Back After Price Crash

The fallout from a collapse in U.S. oil prices continued Tuesday as two of the nation’s largest oil companies announced plans to scale back their operations and limit spending.

(CN) – The fallout from a collapse in U.S. oil prices continued Tuesday as two of the nation’s largest oil companies announced plans to scale back their operations and limit spending.

Houston-based Occidental Petroleum, the largest producer in the sprawling Permian Basin of West Texas and Southeast New Mexico, said in a statement it would slash its capital spending for 2020 by almost $2 billion and launch other “operating and corporate cost reductions” as the price for West Texas Intermediate crude oil, the U.S. benchmark, remained below $35 per barrel.

The company also said its quarterly dividend would be reduced by 68 cents per share, effective in July.

“These actions lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment,” Oxy CEO Vicki Hollub said in a statement.

Marathon Oil, another Houston firm with operations across multiple U.S. shale plays, announced similar moves Tuesday, saying it would immediately cut its capital spending budget for the year by at least $500 million and halt the drilling and completion of wells in Oklahoma, among other measures.

"In response to the recent commodity price volatility from simultaneous supply and demand shocks, we're taking swift and decisive action to defend our cash flow generation, protect our balance sheet, and fund our dividend," the company’s CEO Lee Tillman said in announcing the moves.

The cuts came a day after shale producers Diamondback Energy and Parsley Energy said they would scale back drilling. Meanwhile, the Washington Post reported Tuesday the Trump administration was considering some form of federal aid for oil and gas companies hit by the oil price drop.

The Norway-based analyst firm Rystad Energy has called this week’s plunge in oil markets initiated by a price war between Saudi Arabia and Russia a “bloodbath.”

The firm said Tuesday it expected global oil exploration and production spending to drop by $100 billion this year and another $150 billion next year if prices stay in the $30 per barrel range, a prospect that could drive some oilfield service companies out of business.

“Now the E&Ps will turn every stone and cancel every single non-revenue-generating activity,” Rystad analyst Audun Martinsen said in the note. “In the US shale industry as many as 5,800 horizontal wells could be cut in 2020, which would more than halve the number of wells from the 10,900 planned for 2020.”

The firm said the downturn could lead to a “massive wave” of bankruptcies and consolidation in the oilfield service sector, with companies that handle the work of fracking new wells hit hardest as they struggle to find new work beyond already existing contracts.

Analysts elsewhere echoed the concerns.

“Simply put, if crude stays at $32 [per barrel] most of the sector is worthless,” the firm Tudor Pickering Holt & Co. said in a note Tuesday. “However, we expect over the coming weeks for the industry to put out detailed capex cuts that will ultimately lead to a drop off in US production and, with a normalization of demand at some point, a potentially significant rise in crude by 2022+.”

The latest hurdles come as the industry had already shed jobs amid a drop in drilling rig counts and concerns from investors in 2019.

The Houston region, home to the industry’s white collar and executive workforce, was already poised to lose another 12,400 or so oil-related jobs over the next couple years, according to Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston.

If oil prices hover around $40 per barrel for the longer term, he said, that number could grow by almost 6,000.

“Things looked like they had really settled down in terms of the bankruptcies and all of the financial crisis,” Gilmer said in an interview. “Now, no more. I’m sure this is going to do some real damage if it lasts for more than a month or two.”

The growing spread of the novel coronavirus is putting added pressure on the industry, as the virus constrains global economic activity and thus oil demand.

The International Energy Agency, a leading industry research entity, said in a report Monday the virus was expected to cause an annual drop in global demand for the first time since 2009.

“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” IEA Executive Director Fatih Birol said in a statement. “This is especially true in China, the largest energy consumer in the world, which accounted for more than 80% of global oil demand growth last year.”

In oil-rich Texas, Comptroller Glenn Hegar tried to calm fears about the impact to the state’s broader economy and government operations, saying Monday his office was monitoring the situation but that the fundamentals of the state’s economy “remain strong.”

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