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Paint It Black - E&Ps Slashing Already-Weak Capital Spending Amid Oil Price Rout

You wouldn’t know it yet from outright crude oil production volumes, which stood at 13.1 MMb/d last week, but with crude oil prices in the cellar, the situation for U.S. E&P companies has rapidly gone from bad to worse. The double whammy of the coronavirus and the Saudi’s decision to flood oil markets with new production has cast a pall over the U.S. E&P sector, sending share prices plummeting. Producers had already taken a stripped-down approach to 2020 investment, with previous guidance reducing capital expenditures by 14% in order to boost free cash flow and hike shareholder returns. That was on top of the 7% decline in capex seen in 2019. But in the last 10 days, about half of the 42 E&P companies we track have announced further, substantial cuts in planned capex. And with West Texas Intermediate prompt crude oil futures settling at $25.22/bbl yesterday — well below breakeven for many producers — and still-lower prices a real possibility, more industry-wide reductions are looming as first-quarter earnings are announced in April. Today, we break down what the recent announcements mean for capex and production volumes.

It’s impossible to overstate just how rapidly — and drastically — the world has changed since the last time we assessed 2020 capital spending budgets for the universe of E&P companies we follow back in mid-December 2019 (see Can’t Afford to Love You). The E&P sector’s prospects for growth this year were already bleak. An early look at the 15 companies that had issued 2020 guidance by then showed double-digit percentage drops in spending for this year, particularly among Oil- and Gas-Weighted producers. Then, with more complete 2019 data rolling in from a total of 42 companies, the industry’s early-year guidance indicated a total production gain of 1%, to 4.9 billion barrels of oil equivalent (boe) for 2020. The Oil-Weighted and Gas-Weighted E&Ps forecasted production growth of 4% and 1%, respectively, while Diversified E&Ps’ output was expected to be flat.

That’s all out the window now. Even before this week’s free-falling crude oil prices — the focus of our Save It for Later blog — a parade of E&Ps made announcements indicating that their total capital spending could plummet to $46 billion, a 26% decline from previous guidance and a 36% fall from 2019 levels of $72.4 billion. Oil-Weighted and Diversified E&Ps, which are bearing the brunt of the oil price decline, are trending toward $7.2 billion and $8.2 billion in additional capital spending reductions, respectively — 42% and 32% below their 2019 investment. Gas-Weighted producers, which initially guided to a 32% decline in 2020 outlays because of low natural gas prices, may cut another 10%. The oil and gas companies that have announced steep capital spending reductions have generally not quantified the impact of the cuts on oil and gas production. The exception was EOG Resources, which said March 16 that it expects oil output to be flat instead of up 10%-14% after announcing a 31% capex reduction. We think that revised guidance issued with first-quarter results could show at least a 6% overall decline in production targets for our universe of companies to 4.5 billion boe, levels last seen in 2018. As we said in How Much More Can She Stand, U.S. production has the momentum of a moving train; it will take a few months for those reductions to materialize.

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