Price Crash Forces U.S. Oil Companies To Slash Budgets

Oil prices have hit historical lows amid the global coronavirus pandemic. While analysts were already expecting soft demand growth for 2020, the oil dispute between Saudi Arabia and Russia dragged the prices down. This weak price environment has made many oil producers’ operations unsustainable. As such, upstream companies are curbing capital spending for the year and announcing dividend cuts.

Crude Prices Plummet

The latest OPEC+ meeting saw a Saudi Arabia-Russia disagreement over deeper production cuts to boost oil market fundamentals. As Saudi Arabia failed to secure Russia’s support for additional cuts, it threatened to flood the oil market by boosting production. This took the WTI Crude price index down to the current level of around $33 per barrel compared with $51.42 on Feb 13. A similar trend has been witnessed for Brent Crude, which tumbled nearly 36% in the past month to around $36 per barrel.

Companies Taking a Step Back

Reacting to the market situation, Cenovus Energy Inc. (TSX:CVE) decided to cut its 2020 capital spending and production guidance by 32% and 5%, respectively. In a similar move, Matador Resources Company (NYSE:MTDR) decided to trim its drilling program. While these companies were the first to respond to the oil price crash, more upstream companies are following suit.

Apache Corporation (NYSE:APA) intends to curb 2020 capital budget to $1-$1.2 billion from the previous guidance of $1.6-$1.9 billion. Moreover, to limit exposure to short-cycle oil programs, the company plans to reduce its Permian rig count to zero. Also, the Zacks Rank #2 (Buy) company will slash its dividend payments to 2.5 cents from 25 cents. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Occidental Petroleum Corporation (NYSE:OXY) is another exploration and production company that plans to reduce quarterly dividend to 11 cents per share from 79 cents, which will come into effect from July. It will also reduce capital spending to the range of $3.5-$3.7 billion from initial expectation of $5.2-$5.4 billion. Notably, Hess Corporation (NYSE:HES) is expected to join the club soon, with its revised capital budget guidance. Thankfully, it has already hedged 80% of its 2020 production guidance at $55 per barrel for WTI and $60 per barrel for Brent Crude.

The companies that are reducing capital spending and dividend payments are planning to use the cash for strengthening balance sheets, a move that investors were demanding for a long time now. Strengthening the companies’ financials during a time when oil prices are unprofitable for most of the shale producers is touted to be a beneficial move.

Smart Investing in Times of Turmoil

One can gain big even in this hostile situation by following three smart investing strategies. Investors can look for energy companies with ample financial flexibility and strong balance sheet, which provide them with a larger war chest to draw upon and deal with the current market volatility. Moreover, sticking to low risk operations like midstream, storage and processing can be beneficial for investors. Additionally, large-cap integrated companies with low-risk energy conglomerate business structures and ample free cash flows can be a safe choice for investors, even in a low oil price environment.

(Here you can know the details of 3 Investing Strategies to Survive the Dramatic Oil Crash).

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