Barclays originally predicted capital budget cuts ranging from $12.6 billion to $18.9 billion across the US. This correlated to total cuts approximating 10 – 15 percent, and lowering North American oil investment down to $106.9 billion. The hoped for 860 active rig count gave reassurance of a 6-12 month rebound, however Barclays analyst Paul Cheng wrote, “we think the combination of Iranian production ramp-up, OPEC’s defense of market share, and continued resilience of US shale producers will dampen any potential rebound.”
A more recent report by Cowen & Co. concluded that the state of the industry today is far grimmer than what was discussed in the Barclays report. Cowen projects that, generally speaking, companies will now cut investment by 24 to 28 percent, lower total investment to a total of $89.2 million, and see 51 percent budget cuts. Rig counts are expected to drop by another 300, with a majority of the uprooting coming from shale rich states such as Texas and North Dakota. With job losses already in the hundreds of thousands, the industry is likely to see several more rounds of layoffs.
But the Cowen survey could still be underestimating further damage to come. The report used information gathered in November. At that time, WTI was sitting at $48.50 per barrel. The current $35 barrel price, if it persists, naturally could drive cuts even deeper. With OPEC nations such as Russia are pumping at record levels adding to a global supply unmatched by worldwide demand, $35 barrel oil could be here to stay for the next while. Cowen analysts stated “if these prices persist for much of 2016, budgets would be reduced further and declines in spending may be meaningfully more than what our survey suggests.”
Both upstream and midstream companies are feeling the effects of low oil prices. Kinder Morgan and Chevron have slashed dividends and are currently exploring other budget options. In this environment, a strikingly different corporate strategy is now popular among struggling companies. David Zusman, managing partner and chief investment officer at Talara Capital Management stated in plainly, “[For] 2016, boards are almost universally mandating you spend within cash flow.” What’s more, Survey’s from Evercore ISI predict that a record 80 percent of drilling companies plan to spend within their cash flow this year. Shifting their focus from book economics and earnings to cash flows proves that a larger focus on the time value of production and immediate capital expenditures is now in place.
In their report, Cowen & Co stated “the substantial majority [of companies] would need to see WTI crude prices of at least $60 per barrel to increase expenditures”. The study expects smaller producers to further cut investment by 49.6 percent. Larger companies and majors are expected to cut 34.5 percent and 19.8 percent respectively.