Smaller Companies Attempt Life-Saving Measures To Stem Economic Suffering
Oil companies large and small have pulled out the stops to stay on solid ground. Devon, Diamondback, and Parsley post latest cuts in production.
As tumbling oil prices send tremors through the industry, oil companies large and small have pulled out the stops to stay on solid ground.
Oil and gas producer Devon Energy posted an even bigger quarterly loss on 5 May, and said it expects to cut 10,000 B/D in the second quarter. The company previously cut its 2020 production forecast to between 300,000 to 319,000 BOED, down from 328,000 to 339,000 BOED. Given ongoing price volatility, the company said it will make curtailment decisions on a month-to-month basis.
The Oklahoma-based company, which has been selling its assets to become a pure-play US oil producer, cut its annual budget twice in March. On 30 March, Devon announced it will reduce capital expenditures (CAPEX) by $800 million for the full year, for a reduction of nearly 45% compared to the company’s original 2020 capital budget.
On 4 May, Diamondback Energy and Parsley Energy topped Wall Street profit estimates and said they plan to cut May oil output. Diamondback and Parsley also reported net losses in the first quarter of $1 billion and $4.4 billion, respectively.
Diamondback, which operates exclusively in the Permian basin, will cut 10% to 15% of expected May oil output, while Parsley expects to curtail up to 23,000 B/D in May. “Diamondback is prepared to operate in a lower-for-longer oil price environment, and our cost structure will prove to be a differentiator through this downturn,” Chief Executive Officer Travis Stice said.
Parsley has suspended all new drilling and completion activity in the near term as crude prices tumble. It will temporarily suspend production, activity, and unit costs outlook and further reducing 2020 spending—to less than $700 million from less than $1 billion.
“Importantly, due to our recently completed portfolio transformation, Devon has entered these difficult times with the benefit of a strong balance sheet, excellent liquidity and top-tier assets,” Dave Hager, president and CEO, said. “Our swift response to recalibrate drilling and completion activity and lower operating costs ensures that we can fund all our 2020 capital requirements within cash flow.”
Of course, Devon, Diamondback, and Parsley represent just a sampling of the suffering.
Several producers are considering creative ways to cut their losses. In numerous states producers are pressing regulators to declare their production “economic waste.” That would allow producers to close wells without violating lease agreements.
Others are looking at the legality of declaring “force majeure,” a clause usually reserved for wars, natural disasters or accidents that prevent a company from fulfilling contracts for reasons beyond its control. Continental became the first to do this last month, surprising shippers and refiners.
Continental Resources, Oklahoma’s largest operator, had shut down about 95% of its production in the state by 21 April. Oasis Petroleum was halting all drilling in the Bakken, where it pumped about 80,000 BOED at the end of 2019.
Hess Corp said it expected to halt drilling on five of its six rigs in the Bakken by the end of May.
Whiting Petroleum, once the largest oil producer in North Dakota, has declared bankruptcy, while smaller producers in the Bakken such as Bruin E&P Partners have hired restructuring advisers.
Oilfield services company Canary, which has operations in the Bakken region, has had to furlough more than half of its workers since the oil downturn.
Resource Energy, which pumped about 5,000 B/D before shutdowns, had kept the remaining producing fifth of its wells on leased land in North Dakota, where the company must keep pumping oil or lose its leases.
Given the April agreement reached by OPEC+, a 9.7 million B/D cut began on 1 May, and will extend through the end of June. The cuts will then taper to 7.7 million B/D from July through the end of 2020, and 5.8 million B/D from January 2021 through April 2022.
In some states, the question of who will enforce that mandate is up for grabs.
However, after much debate, the Texas Railroad Commission on 5 May determined it will not set oil production quotas, saying there was no point in cutting Texas production unless other states and producing countries would do the same. Citing the opposition of every oil and gas industry association, Railroad Commission Chairman Wayne Christian said the state would not intervene at a time when producers are already cutting production.
In addition to the woes of smaller, independent producers, in recent weeks, five of the top oil majors—ExxonMobil, Chevron, Royal Dutch Shell, BP, and Total—have outlined plans to slash production. Oil and gas output from some of the world's top oil companies is set to drop by nearly 11% in Q2 2020, to levels not seen in at least 17 years. The cumulative output for Exxon Mobil, Chevron, Royal Dutch Shell, BP and Total will drop to the lowest since at least 2003.