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Oil & Gas Stock Roundup: Operators Clamp Down on Capex to Combat Price Slump

Nilanjan Choudhury

It was a week where the oil market continued to struggle though natural gas prices posted a small gain.

On the news front, Chevron CVX, Equinor EQNR and Eni E were the latest energy biggies forced to slash this year’s project spending budget amid a prolonged oil price slump.

Overall, it was a mixed week for the sector. While West Texas Intermediate (WTI) crude futures dropped 5% to close at $21.51 per barrel, natural gas prices gained 1.9% for the week to finish at 1.634 per million Btu (MMBtu). In particular, the oil markets extended their decline from the previous week when the commodity reached its lowest settlement since February 2002, forcing even the large oil companies to suspend share buyback programs.

Coming back to the week ended Mar 27, the crude benchmark notched up its fifth successive loss in a row, as tensions between Russia and Saudi Arabia combined with continued panic over the spread of coronavirus kept the commodity under pressure. Oil fundamentals appear to be struggling under the twin strains of untamed supply from major producers in the face of continuously falling global consumption on account of the coronavirus pandemic.

Meanwhile, natural gas ended slightly higher, following a larger-than-expected decrease in supplies. However, the narrative remains bearish as the fuel faces the prospect of a coronavirus-related steep drop-off in usage. The commodity is already weighed down by mild winter weather (leading to pessimistic heating demand) amid strong production.

Recap of the Week’s Most Important Stories

1.  As a response to the bearish oil environment, Chevron announced steps to "rationalize" its planned capital spending for the current year in response to the sudden oil price slump. This San Ramon, CA-based company trimmed its 2020 capital spending guidance by 20% to $16 billion from the prior expectation for organic capital and exploratory expenses. Further, it anticipates total capital and exploratory expenses for the last two quarters of 2020 to be around $7 billion, suggesting an annual run rate of 30%, lower than the previously provided budget announced in December 2019.

The company is making efforts to lower its run-rate operating costs in excess of $1 billion by this year end. Apart from the cost cuts, Chevron suspended its $5-billion share buyback program to weather the current oil price woes.

This integrated energy player expects its 2020 production volumes to be in line with the 2019-level despite reducing capex, which, in turn, is indicative of its increasing operational efficiencies. However, by 2020 end, Permian production is predicted to see a 20% drop from the earlier guidance to 125,000 barrels of oil equivalent per day (boe/d). (Chevron Trims Capex View Amid Price Turmoil, Keeps Dividend)

2.  Equinor recently announced its downward revision of 2020 capital budget in the wake of a weak crude pricing scenario. So the company - carrying a Zacks Rank #3 (Hold) - aims to prune capital spending as well as exploration and operating expenses by a total of $3 billion to solidify its financial footing in a market space.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s reaffirmed capital budget for this year is indicative of a roughly 20% cut from its prior guidance of $10-$11 billion to $8.5 billion. This includes a reduction of $400 million in exploration expenses to $1 billion and a curtailment of $700 million in operating costs compared with past projection. Apart from the cost cuts, earlier this week, Equinor paused its $5-billion four-year share buyback program to tide over the current oil price disruption.

Further, the company plans to adjourn all U.S. onshore activities, drilling and completion operations wherein it parked billions of dollars in recent years. Management at Equinor also informed that these new measures will allow its operations to be cash-flow neutral in 2020 at an average oil price of around $25 per barrel. (Equinor's 2020 Capex View Moves South on Oil Price Rout)

3.   Eni announced that it has downwardly revised 2020 capital budget in the wake of a weak crude pricing scenario.

The company has decided to lower capital budget for 2020 by roughly €2 billion, representing 25% of the total budget. The integrated energy firm will also slash its planned capital spending for 2021 by roughly €2.5-€3 billion, representing 30-35% of the budget. In addition to capital spending reduction, the company has also decided to cut operating expenditure for 2020 by almost €400 million.

Given lower spending, the company projects 2020 production volumes to decline year over year. In 2020, Eni expects to produce daily oil equivalent volumes in the range of 1.8-1.84 million barrels per day, indicating a decline from the prior-year’s 1.87 million barrels. The average annual production volume estimate for 2021 is the same as 2020, Eni added. (Eni Revises 2020 Capex Downward on Oil Price Weakness)

4.   Phillips 66 PSX recently announced plans to reduce capital expenditure by $700 million (around 18%) to $3.1 billion in order to navigate through the current tough business environment. The stock jumped 8.3% yesterday, following the news. Notably, the company has paused the share buyback program from Mar 18 and expects to resume it later.

In the refining business, the company intends to defer and cancel some discretionary projects as the demand for refined products is expected to go down due to the social distancing mandate. The company’s head of commercial operations, Brian Mandell estimates 20% demand destruction in the United States, while the same in the West Coast region is expected to be 30%, primarily due to longer isolation periods.

The company will likely delay several midstream projects as crude production dries up due to the current low price environment. As such, Phillips 66 has put its Red Oak Pipeline and Sweeny Frac 4 projects in the list of deferrals. It now expects total 2020 spending of $958 million in midstream activities, down from the previous estimate of $1,425 million. Notably, $821 million of the total will be directed toward growth purposes. (Phillips 66 Cuts 2020 Capex, Halts Share Buybacks, Up 8.3%)

5.   Chinese energy giant PetroChina Company Limited PTR reported 2019 earnings of RMB 45,677 million or RMB 0.25 per share compared with RMB 53,030 million or RMB 0.29 in the year-earlier period. However, China’s dominant oil and gas producer’s total revenues during the year increased 6% from the 2018 level to RMB 2,516,810 million on higher oil and gas production.

At the end of 2019, the group’s cash balance was RMB 86,409 million and long-term debt amounted to RMB 627,186. PetroChina’s debt-to-capital ratio was 30.3%. Meanwhile, cash flow from operating activities was RMB 359,610 million. Capital expenditure for the year reached RMB 296,776 million, up 15.9% from the year-ago level.

In a rare move, PetroChina withheld its capital expenditure and production targets for 2020 as the coronavirus pandemic leaves the worldwide energy industry struggling for survival following a collapse in demand amid a supply glut. The company cautioned investors about 'severe' profit hit from the contagion that originated in China and has now spread across the globe. (PetroChina 2019 Earnings Down, Warns of Coronavirus Impact)

Price Performance

The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.

Company    Last Week    Last 6 Months
XOM            +12.9%          -48.3%
CVX             +15.8%          -35.6%
COP            +9%                -44.6%
OXY             +13.5%           -71.6%
SLB             -3.6%              -54.8%
RIG             +12.5%            -70.9%
VLO            +16.5%            -46%
MPC           +22.2%           -62.9%

The Energy Select Sector SPDR – a popular way to track energy companies – rose 12% last week. The best performer was downstream operator Marathon Petroleum MPC whose stock jumped 22.2%.

But longer-term, over six months, the sector tracker is down 49%. Houston-based oil and gas producer Occidental Petroleum OXY was the major loser during this period, experiencing a 71.6% price plunge.

What’s Next in the Energy World?

As global oil demand plunges, market participants will be closely tracking the regular releases to watch for signs that could indicate a rebound. In this context, the U.S. government statistics on oil and natural gas – one of the few solid indicators that comes out regularly – and the Baker Hughes data on rig count, will be on the energy traders' radar.

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