What happened
Crude oil is bouncing back today following yesterday's historic crash. By 11 a.m. EDT, WTI, the U.S. oil benchmark, had rallied more than 6%, pushing its price above $33 a barrel.
That snapback, as well as a string of capital spending reduction announcements, helped boost most energy stocks today. Several rallied by more than 10% at one point in early-morning trading, including Ovintiv (OVV -0.03%), Cenovus Energy (CVE -0.34%), Pioneer Natural Resources (PXD), Callon Petroleum (CPE), and Marathon Oil (MRO).
Image source: Getty Images.
So what
Several oil producers have announced plans to reduce their drilling activities and capital budgets in light of the stunning decline in oil prices this year. Ovintiv announced today that it would "be reducing our near-term capital spending to ensure we maintain cash flow neutrality in the current market conditions." Ovintiv also reassured investors that it has the balance sheet strength and liquidity to navigate through the market's current rough patch.
Cenovus Energy also announced a reduction in its activity level. The Canadian oil sands producer said it would slash its planned full-year capital spending by 32% while also suspending its crude-by-rail program. Because of that, Cenovus expects its total production to be about 5% lower than its initial forecast for the full year.
Marathon Oil also revised its 2020 capital budget. The company cut it by $500 million, or 30% from last year's spending level. As part of that reduction, the company will suspend all its exploration activities and its operations in Oklahoma. It will also meaningfully reduce its drilling in the Permian Basin. CEO Lee Tillman said these efforts will allow Marathon Oil to "defend our cash flow generation, protect our balance sheet, and fund our dividend."
Pioneer Natural Resources, meanwhile, hasn't yet provided details of changes to its spending plans, but will in the coming days, according to comments by CEO Scott Sheffield in an interview with Bloomberg. He said that his company is "preparing for two years of low prices and will make the necessary adjustments to maintain our great balance sheet." He also warned that oil production in the U.S. could plunge 20% by the end of next year if oil stays at the current level, because oil companies won't generate enough cash to fund the drilling needed to maintain production.
Other drillers like Callon Petroleum will likely announce budget cuts in the coming days so that they can protect their balance sheets. Callon currently expects to spend $975 million this year, which is higher than last year's level due to the acquisition of Carrizo Oil & Gas. However, it based that budget on oil averaging $50 a barrel this year, which seems unlikely given the recent plunge. The company will almost certainly need to reduce its activity level so that it doesn't outspend cash flow and tack on more debt to its balance sheet.
Now what
Oil companies are quickly adjusting to the new reality of much-lower oil prices this year. That will enable financially stronger companies to navigate through this challenging time so that they don't drill themselves into a bigger hole by taking on more debt to fund their operations.
