With the prospect of another plunge in crude prices looming after two months of stability, U.S. shale oil producers may face another round of spending cuts to conserve cash and survive the downturn. A deeper retrenchment would have far-reaching effects. Additional cutbacks would further gut the already-hemorrhaging oilfield services industry and may heighten expectations for a steeper drop in U.S. crude output later this year.
They would also reinforce the United States’ emerging role as the world’s “swing producer,” with dozens of independent companies that can quickly ramp up production in good times and dial it back in a downturn. “If I were an oil company today, I would talk about one thing: how far can you cut costs,” said Fadel Gheit, an oil analyst at Oppenheimer in New York. “They cannot control anything else.” Gheit said he expected a new wave of capital budget cuts starting in May, when much of the energy industry reports quarterly results.
U.S. oil companies have slashed spending 20 to 60 percent since the price of oil fell by half from June to January, and oilfield services firms shed more than 30,000 jobs, according to Reuters compilations of public disclosures. Debt rating agency Moody’s estimates that about a fifth of the North American exploration and production companies it follows will slash budgets by more than 60 percent this year while more than half will cut spending by at least 40 percent.
After a pause brought a sense of relief, the price slide has resumed. U.S. benchmark West Texas Intermediate (WTI) has fallen 12 percent in a week to $42 on concerns about lingering global oversupply. Citibank and Goldman Sachs have said oil could tumble to $30 or even $20. One Houston banker said acquisition chatter has picked up in the past two weeks but that no company wanted to be the first to seek buyers given potential investors and sellers remain wide apart on valuations. Companies have made clear they will not hesitate to trim more to avoid credit rating downgrades and further stock sell offs.
“We don’t see value in chasing growth in this environment,” Al Walker, chief executive of Anadarko Petroleum Corp, a top shale company, said this month. Oil firms slashed tens of billions of dollars from their capital budgets be- tween November and February. Many have cut costs already twice and could do it again after first-quarter earnings in May, though Cono- coPhillips has already announced cuts on Tuesday. Conoco said it expected to spend about $11.5 billion per year over the next three years, down from a prior forecast of $16 billion. Oil producers can save money by shrinking their rig fleets and delaying so-called completions, which include fracking, of wells to bring them online, which accounts for 60 to 70 percent of a well’s total cost.
Anadarko expects to end this year with 420 to 440 uncompleted wells, while EOG Resources Inc, often considered the strongest U.S. shale oil company, expects to have 285, with postponed completions saving it about $500 million.
