Oil companies are already beginning to pare back their activity in the Permian, with cutbacks coming not just from smaller drillers, but also the oil majors.
Chevron said on Tuesday that it would cut capex this year by 20 percent, or $4 billion, with half of that cut concentrated on its Permian operations. “Given the decline in commodity prices, we are taking actions expected to preserve cash, support our balance sheet strength, lower short-term production, and preserve long-term value,” Chevron CEO Michael Wirth said in a statement.
Lower spending will translate into the major’s Permian output ending the year 120,000 barrels per day lower than previously expected. “The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction,” Jay Johnson, Executive Vice President of Upstream, said.
Chevron also said that it would suspend its share buyback program, but the spending cuts were aimed at defending its dividend. “Our focus is on protecting the dividend,” CFO Pierre Breber said.
Prior to the announcement, Chevron needed oil prices at around $50 per barrel in order to finance its operations and cover its dividend, according to an estimate from Goldman Sachs. The oil major’s decision to slash spending is aimed at maintaining those shareholder payouts in a world of much lower pricing.
The decision was couched as a temporary measure, with the company’s Permian project ramping up as soon as the pandemic and oil market bust blew over. “This is the fourth time in my career I’ve seen [crude] prices drop by more than 50% in a very short period of time,” Wirth told CNBC. “We’ve been here before, we know what to do, we’re taking action.”
But the language sounds rather optimistic, given the historic rout in global demand. Morgan Stanley said that U.S. GDP could contract by a whopping 30 percent in the second quarter. Federal Reserve Bank of St. Louis President James Bullard said that U.S. unemployment could reach 30 percent, a level not seen even during the Great Depression of the 1930s.
The airline industry is preparing for a nationwide shutdown of virtually all passenger flights for a period of time. While everyone is hoping that the shutdown related to the global pandemic is temporary, there will almost certainly be lasting economic scars.
More directly related to the oil industry, the piling up of oil inventories to unprecedented levels means that oil prices won’t simply return $50+ after the worst of the pandemic passes.
“The only thing that will help the oil price long term is a lasting removal from the markets of overcapacities, which is already beginning now,” Commerzbank said in a report on Tuesday. “Be it state-owned oil companies, large international energy corporations or US shale oil companies, all of them will soon (have to) massively reduce their investments.”
On Monday, S&P Ratings cut its outlook for Chevron’s credit to negative from stable.
The Permian basin lost 13 rigs last week, but because there is typically a several-month lag between major price movements and changes in the rig count, the worst for the Permian lies ahead.
Schlumberger, the world’s largest oilfield services company, announced on Tuesday plans to cut spending by 30 percent this year. The company said that the U.S. rig count could fall below the 2016 nadir, when Permian rigs bottomed out below 150 (less than half of current levels) and total U.S. rigs fell to around 400, compared to 772 currently.
In other words, the shale industry is set to scrap hundreds of rigs in the coming months, according to the world’s largest oilfield services company. Last week, Halliburton announced plans to furlough 3,500 workers.
ExxonMobil has yet to reveal its revised spending program, but it too will likely cut spending. Exxon needs oil prices as high as $70 per barrel in order to finance its dividend and cover expenses. Its dividend yield is trading at around 10 percent, which many analysts see as unsustainable. Exxon has borrowed to cover its shareholder payouts, but it also just saw its credit rating cut.
Something has to give, and Exxon will almost certainly feel compelled to follow in Chevron’s footsteps and slash its Permian operations. Reuters reports that Exxon’s large offshore gas drilling project and LNG export terminal in Mozambique could be delayed. Exxon’s East Africa campaign is one of just a handful of flagship projects worldwide for the major, along with offshore drilling in Guyana, LNG in Papua New Guinea, and, of course, fracking in the Permian and associated petrochemical projects on the Texas coast.
The cuts from Chevron – and likely forthcoming cuts from Exxon – are a substantial climb down from just a few weeks ago. Both majors gave their annual Investor Day presentations just three weeks ago, in which they reiterated their aggressive drilling and production targets in the Permian.
But everything has changed since then. With Brent in the $25 per barrel range, roughly 10 percent of global supply is uneconomic.
By Nick Cunningham of Oilprice.com
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