March 9, 2020 / 3:56 PM / in a month

U.S. shale producers rush to cut spending, output as oil prices tank

HOUSTON (Reuters) - U.S. shale producers on Monday rushed to deepen spending cuts and could reduce future production as oil prices tumbled after OPEC’s decision to pump full bore into a global market hit by shrinking demand due to the coronavirus outbreak.

FILE PHOTO: Drilling rigs operate at sunset in Midland, Texas, U.S., February 13, 2019./File Photo

Crude futures fell 20% on Monday, the largest one-day slide since the 1991 Gulf War, after the Organization of the Petroleum Exporting Countries and allies failed to agree on new output cuts and let production curbs lapse this month. [O/R]

For the last three years, OPEC and its allies, chiefly Russia, have cut supply to support prices, leaving the door open for U.S. shale producers to boost production and capture market share. The United States is now the largest oil producer in the world, pumping out nearly 13 million barrels per day (bpd), but the companies operating in fields in Texas, New Mexico and other states have struggled to make enough money to satisfy investors.

Even before the OPEC deal collapse, those companies were already pulling back on capital expenditures and aiming for flat to modest production gains, and that activity will accelerate.

“You’re going to see activity grind to a stop. At this level, this is survival: for some companies, they’ll be gasping for oxygen,” said Dan Yergin, vice chairman of IHS Markit.

Shale companies need prices at least in the low $40s per barrel to cover direct costs, said Ian Nieboer, a managing director at consultant Enverus. If U.S. prices remain at a low-$30-a-barrel range, “it starts to look more lethal,” he said.

U.S. crude futures CLc1 were down more than $8 a barrel at about $33 a barrel on Monday, after hitting a four-year low, sending debt and equity prices sharply lower.

Producers with high debt loads were hit hard in the stock market, such as Apache Corp (APA.N) falling nearly 54% and Occidental Petroleum Corp (OXY.N) down 52%. Occidental bought Anadarko Petroleum last year for $38 billion, and Monday’s declines sank its market value to $11.2 billion.

Diamondback Energy Inc (FANG.O) and Parsley Energy Inc (PE.N), two of the largest shale independents, said they slashed drilling and well completions to maintain cash flow above ongoing expenses. Parsley said it would cut its drilling rigs to 12 from 15 as soon as possible. The cuts reflect a wave of reductions underway elsewhere, said analysts.

Larger oil companies with refining and chemicals businesses were somewhat protected. Exxon Mobil Corp shares (XOM.N) fell 12% and Chevron Corp (CVX.N) fell 15%.

Diamondback said it released a third of the crews completing new wells, planned to cut three drilling rigs this quarter, and would reduce its 2020 spending budget by an undisclosed amount.

The lower activity will remain “until we see clear signs of commodity price recovery,” said Diamondback Chief Executive Travis Stice. “We will maintain positive cash flow and protect our balance sheet and dividend,” he said.

The U.S. government recently forecast domestic production would rise 1 million barrels per day to more than 13 million bpd. But in light of reduced demand and OPEC’s higher output, oil production growth “will be roughly zero” compared with 2019, estimated Paul Mecray, managing director for Tower Bridge Advisors.

Reduced global demand means the call on U.S. shale will fall 2 million-3 million bpd, said Paul Sankey, a researcher at investment firm Mizuho Americas. That would imply an additional 20% reduction in oil companies’ spending this year, he wrote.

RIPPLE EFFECT

The weekend decision to pump full bore is “analogous to what OPEC did around 2014,” said Brock Hudson, managing director at investment bankers Carl Marks Advisors. That effort - designed to keep OPEC’s market share against rising U.S. shale output - ultimately failed and OPEC later set production curbs.

But this time, shale is lacking support from investors who four years ago bought their debt, financed reorganizations and kept shale producing. This time, U.S. producers are “going to be suspending completions and things like that” to keep producing, said Hudson.

Companies likely will halt well completions at a pace that could lead U.S. production to decline by 1 million bpd by the end of summer, said Richard Spears, vice president of oilfield consultancy Spears & Associates.

The ripple effect will hurt already hard-hit oilfield services firms. Scandrill Inc expects to cut about 22 workers assigned to one rig after a customer on Friday decided to pull back on new drilling, said Senior Vice President Paul Mosvold.

“Private equity-backed (oil companies) are going to pull back fairly dramatically on the rig count – which is the canary in the coal mine,” Mosvold said.

The drop in oil prices could benefit natural gas producers by reducing the volume of gas sold at below-market prices by oil producers, said Chris Kalnin, CEO of Kalnin Ventures, which operates shale wells in the eastern United States.

Reporting by Jennifer Hiller in Houston, Liz Hampton in Denver and Jessica Resnick-Ault in New York; Writing by Gary McWilliams; Editing by Marguerita Choy and Richard Chang

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