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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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U.S. Shale Slashes Capex As Low Oil Prices Bite

Shale

Seven months into the OPEC production cut deal, oil prices are not higher than they were at the end of last year, as the stubborn global inventory overhang and rising U.S. output have been offsetting price gains. Now, one week into second-quarter earnings releases, U.S. shale drillers started announcing cuts in capital budgets for this year, citing lower-for-longer oil prices.

After a booming drilling start to the year—encouraged by a short-lived oil price rise—some U.S. producers are now trying to show anxious investors that they will be spending within their means after the oil price recovery stumbled in the second quarter and failed to materialize, contrary to the optimistic expectations at the beginning of this year.

On the one hand, the latest capex cuts are the answer to the failed oil price recovery. On the other hand, by scaling back budgets, U.S. producers are showing the market and investors that they intend to keep financial discipline and won’t stretch spending beyond what they can generate as cash flows.

At the beginning of this week, oilfield services provider Halliburton set the tone, with Executive Chairman Dave Lesar saying on a call:

“Today, rig count growth is showing signs of plateauing and customers are tapping the brakes. This demonstrates that individual companies are making rational decisions in the best interest of their shareholders.”

And U.S. exploration and production companies did just that. Related: Barclays: Oil Could Rise By $7 If U.S. Sanctions Venezuela

On Tuesday, Anadarko badly missed Q2 earnings estimates and said it that would be cutting spending by US$300 million. “The current market conditions require lower capital intensity given the volatility of margins realized in this operating environment,” Anadarko said.

On Wednesday, Hess Corporation revised 2017 full-year guidance, saying that E&P capital and exploratory expenditures are projected to be US$2.15 billion, down from original guidance of US$2.25 billion.

On the same day, Whiting Petroleum said that it was revising full-year 2017 capital budget down to US$950 million, compared to US$1.1 billion in capex planned as of April this year. In the Q2 release, Whiting also said that it was planning to drop two rigs, one in the Williston Basin and one in the DJ Basin, and run a four-rig program (all Williston Basin) through year-end.

Again on Wednesday, Sanchez Energy said that “Given the challenged current oil and gas price environment, the Company anticipates that it will reduce its 2018 capital budget by approximately $75 million to $100 million in order to better align capital spending with operating cash flow while remaining focused on higher rate of return projects that optimize capital efficiency.” Related: Never Again: Big Oil Is Back And Practicing Caution

“Drilling activity, which currently consists of eight drilling rigs and five completion crews, will be reduced to five drilling rigs by the end of September 2017, as the Company’s 2017 drilling plans are concentrated on the highest capital efficiency areas of its assets through the remainder of the year and into 2018,” Sanchez noted.

On Thursday, ConocoPhillips lowered 2017 capital expenditure guidance to US$4.8 billion, from the US$5.0 billion capex outlook announced with the February 2017 release of the 2016 results.

These were just the first wave of Q2 results report—many U.S. independents are expected to report figures next week.

The first Q2 results and guidance are in, and what’s become evident is that the U.S. shale patch is more cautious now than it was three months ago, and is trimming budgets to show that this time around, financial discipline is top priority.

By Tsvetana Paraskova for Oilprice.com

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