Energy Firms Step Into 2019 With Caution: Capex Cuts Galore

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As we know, 2018 was a tumultuous year for the Energy sector, with most of the oil and gas companies taking a beating amid commodity price volatility due to supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds. West Texas Intermediate started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived, with the commodity plunging around 30% since then.

The recent weakness in the commodity prices has made the energy companies to rethink their strategies and consider capex cuts once again. Notably, after following capital discipline during the crude downturn (from mid-2014 to 2016), energy companies again resorted to boost their capital expenditure since 2017. However, pullback in the commodity price has convinced explorers and producers to take a relatively conservative approach on capital expenditure programs again this year. Instead of raising their capital outlays, the energy companies are now finding it more prudent to focus on shareholder value maximization

Remodeling of portfolio and strategies undertaken during the slump period made the companies more resilient to reduced crude prices, with many firms managing to achieve break-even at a minimum oil price of $50 a barrel. However, renewed concerns regarding economic slowdown and slower U.S. shale production growth rate, along with weakening oil demand are indications that crude prices may fall further.

The companies are thus looking to cut down on spending, develop sophisticated technologies and generate strong cash flow from operations. Producers in the American shale resources are not planning to allocate money for drilling new wells this year but will instead possibly allocate their capital budget for drilled but uncompleted wells.

U.S. Firms Trim Capex Amid Growing Crisis

Recently, two oilfield service giants Halliburton Company HAL and Schlumberger Limited SLB released weaker year-over-year earnings. In response to changing market dynamics, both the companies are looking to cut down on spending. Schlumberger has set its 2019 capital budget in the range of $1.5-$1.7 billion, lower than last year's $2.2 billion. Halliburton has also slashed its 2019 capital budget by 20% and now plans to spend $1.6 billion.

Drilling contractor Nabors Industries Limited NBR has also planned to restrict its 2019 capital spending at $400 million versus expected capital expenditure of $500 million in 2018. (Read More: Nabors to Cut Costs, Dividend & Capex to Reduce Debt )

Permian pure-play Parsley Energy, Inc. PE also chopped its 2019 capital program to $1,350-$1,550 million, which is lower than the updated 2018 capital expenditure guidance of $1,650-$1,750 million. (Read More: What Does Parsley Energy's 2019 Capital Budget Plan Reveal? )

Parsley carries a Zacks Rank #3 (Hold).

Anadarko Petroleum Corporation has also lowered its 2019 capex budget from the 2018 level and now expects the same within $4.3-$4.7 billion.

Amid the recent oil and natural gas liquids' price decline, Antero Resources Corporation has lowered its 2019 drilling and completion capital budget, and now expects the same in the range of $1.1-$1.25 billion.

Oklahoma-based upstream player Gulfport Energy Corporation expects 2019 outlay in the band of $565-$600 million, lower than the 2018 level of $814 million. (Read More: Gulfport Unveils 2019 Capex & Guidance, Boosts Buyback )

Very recently, EQT Corporation also estimated its 2019 capital program in the band of $1.9-$2 billion, lower than 2018's anticipated spending of $2.4 billion.

Oklahoma-based upstream player Chesapeake Energy Corporation CHK also plans to trim its budget level in 2019 by reducing rig counts by more than 20% (from 18 to 14).

Houston-based Goodrich Petroleum Corporation has also cut its 2019 investment by $40 million and now plans to spend roughly $90-$100 million.

Canadian Firms Also Facing Capex Crunch

As we know, pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate. While oil production is surging in Canada, the country's exploration and production companies remain out of favor, primarily due to the scarcity of pipelines. Moreover, infrastructural bottlenecks have resulted in a supply glut situation. Reeling under discounted crude prices and pipeline crisis, the Canadian energy sector is struggling to find a path to growth.

Considering the current state of affairs in the Canadian oil industry and Alberta government's plans to curb output, many Canadian players have slashed their capital expenditure budgets for 2019.

Amid the growing crisis, one of the country's leading energy companies, Canadian Natural Resources Limited CNQ slashed its capital budget by C$1 billion. The company's 2019 capex is now estimated at C$3.7 billion, down 20% from the projected investment in 2018 and well below its preferred range of C$4.7-C$5 billion. (Read More: Canadian Natural Slashes Capex Amid Pipeline Pinch )

Soon after, Canadian integrated firm Cenovus Energy Inc. also trimmed its 2019 spending levels by 4% and now plans to invest within C$1.2-C$1.4 billion.

Another integrated company Husky Energy Inc. also revised down its capex forecast to C$3.3-C$3.5 billion from prior guidance of C$3.7 billion.

Calgary-based Crescent Point Energy Corporation CPG also chopped 2019 capital expenditure by around C$500 million (or 30%) from a year ago. Crescent Point now forecasts 2019 capex in the band of C$1.2-C$1.3 billion. (Read More: Crescent Point Trims 2019 Capex: What Else Should You Know? )

Very recently, Canadian oil sands producer MEG Energy Corporation also halved its 2019 capex to a maximum of C$275 million.

Wrapping Up

With oil price volatility on the rise amid concerns over weakening demand, logistical constraints, U.S.-Sino trade tiff, global recession and financial turmoil, we appreciate the energy companies' efforts to revise their strategies and slash capex budgets for 2019. The improvement in capital efficiency, directing focus toward high-margin investments and increasing shareholder value may aid the companies to stay afloat amid the blues.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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