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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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U.S Drillers Post Billions In Losses As Hedges Roll Off

As fourth quarter earnings start trickling in, lots of losses are piling up in the shale industry and another round of cuts are expected.

Over the next week or so, the U.S. oil and gas industry could announce more than $15 billion in losses for 2015, according to Bloomberg.

On January 26, Hess Corporation reported a net loss of $3 billion for the full-year of 2015, with a $1.8 billion loss in the fourth quarter alone. Production was flat at 362,000 barrels of oil equivalent per day (boe/d), but the company also had to reduce its estimated recoverable reserves because of lower oil prices. Hess had proved reserves of 1.086 billion boe, down from 1.431 billion boe a year earlier, or a reduction of 25 percent. Hess will also slash spending this year by 40 percent to $2.4 billion.

On January 27, Murphy Oil announced a loss of $2.27 billion for the year. Murphy also slashed capex plans for 2016 by 62 percent compared to last year’s spending levels. Anadarko is set to announce on Feb. 1, and at the time of this writing, expectations are for a full-year $6 billion loss.

Continental Resources announced some pretty severe cuts on January 26 to its 2016 spending program. The Oklahoma City-based shale driller said that it will spend $920 million this year, a 66 percent cut from the $2.7 billion it spent in 2015. Related: Rumors of OPEC-Russia Coordination Send Oil Prices Surging

The company, having largely abandoned its hedges in late 2014 in an ill-timed move, is having to slim down its operations. The lower spending will translate to lower production, in one of the most concrete signs yet that shale drillers won’t be able to keep up production with oil prices down below $40 per barrel. Continental expects production to fall from 210,000-220,000 boe/d in 2015 to just 180,000-190,000 boe/d in 2016.

That amounts to a nearly 15 percent drop off in output, which is even more stark considering last year it had expected production to continue to grow through 2016. In other words, if Continental is any guide, the shale patch is being forced to retreat amid plunging oil prices.

Continental estimates that it will be cash flow neutral with oil at $37 per barrel. "In terms of our budget, each $5 move in WTI prices impacts our full-year cash flow by $150 million to $200 million,” senior vice president and CFO, John Hart, said in a statement. Continental will announce its fourth quarter and full-year earnings in February. Related: Confusion On Saudi Proposed Production Cut See Oil Prices Spike

It is Chevron, however, that made the biggest splash so far this earnings season. Chevron is the first super major to report earnings, and it revealed its first quarterly loss since 2002. The company lost $588 million in the fourth quarter, sharply down from the $3.5 billion profit in the same quarter in 2014. That included $1.1 billion in impairment charges as it had to write down some assets. Chevron has promised not to touch its dividends, and will send $2 billion to shareholders in a few weeks.

Digging deeper, however, Chevron’s situation looks a bit worse than those headline figures. Capex of $34 billion for 2015 vastly exceeded its cash flow from operations at $19.5 billion. Net debt, as a result, nearly doubled from $14.6 to $27.3 billion.

One promising development for Chevron is that its terribly delayed, terribly over budget Gorgon LNG project in Australia is set to come online “within the next few weeks.”

ExxonMobil and BP report on Feb. 2; Royal Dutch Shell reports Feb. 4; Total reports on Feb. 11. Related: Russian-OPEC Production Cut Remains A Long Shot

“It’s going to be interesting to see what the companies do with their 2016 budgets,” Michael Scialla, an analyst at Stifel Nicolaus & Co., told Bloomberg on January 26. “Most have said they plan to stay within their cash flows but with oil now down around $30, I think they’re going to be forced into some draconian cuts.”

The cuts will be reflected in lower production at some point. For companies like Continental Resources, that is set to happen this year. For larger companies like Chevron and its peers, falling production could show up somewhere down the line when major projects fail to come to fruition.

According to Rystad Energy, based in Norway, the energy industry has scrapped $230 billion in projects that were on the drawing board but had not yet received greenlights. That equates to about 3 million barrels of oil production per day that might have come online over the next decade, production that will now not be developed. “Risky exploration spending has been called off; incremental developments such as infill drilling at already producing projects have faced higher hurdles for approval,” Rystad analyst Readul Islam wrote. “However, post-appraisal pre-sanction projects have borne the brunt of the bloodletting.”

By Nick Cunningham of Oilprice.com

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