By Jennifer Hiller
HOUSTON (Reuters) – U.S. shale producers on Monday rushed to deepen spending cuts and reduce future production as oil prices tumbled amid OPEC’s decision to pump full bore into a global market hit by shrinking demand due to the coronavirus.
Crude futures fell by as much as a third 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]
U.S. crude futures
Diamondback Energy Inc
Producer shares dropped sharply with Apache Corp
Larger oil companies with refining and chemicals businesses were somewhat protected. Exxon Mobil Corp
Diamondback said it released a third of the crews completing new wells, plans to cut three drilling rigs this quarter, and will reduce its 2020 spending budget by 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 2-3 million bpd, said Paul Sankey, a researcher at investment firm Mizuho Americas. That would imply an at least 20% further reduction in oil companies’ spending this year, he wrote.
The ripple effect will hit oilfield service firms.
KLX Energy Services, a Houston-based provider with operations across U.S. shale fields, said demand will drop. Current weak oil and gas prices “could cause further deterioration in E&P spending and investment in the coming months,” it told investors on Monday.
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 a 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.
Shale producers had chopped more then 10% off 2020 budgets, aiming for modest increases or flat output at lower spending.
(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)