The Perm boom breaks

Oil companies are already starting to cut back their operations in the Permian, with cuts coming not only from smaller drills but also from the oil majors.

Chevron said Tuesday that it would cut investment by 20 percent or $ 4 billion this year, with half of that cut going to focus on its perm operations. “With commodity prices falling, we are taking measures to get cash, strengthen our balance sheet, cut short-term production and maintain long-term value,” said Michael Wirth, CEO of Chevron, in a statement.

Lower spending will result in the major’s Perm production at the end of the year being 120,000 barrels a day lower than previously expected. “The flexibility of our capital program allows us to respond to these unexpected market conditions by delaying short-term investments and accelerating projects that are not yet under construction,” said Jay Johnson, Upstream’s Executive Vice President.

Chevron also said it would suspend its share buyback program, but the spending cuts aimed to defend its dividend. “Our focus is on protecting the dividend,” said CFO Pierre Breber.

Before the announcement, Goldman Sachs estimated that Chevron would need around $ 50 a barrel of oil to fund its operation and pay its dividend. The oil major’s decision to cut spending aims to maintain these shareholder payouts in a world with much lower prices.

The decision was taken as a temporary measure, and the company’s Permian project was accelerated once the pandemic and oil market were over. “This is the fourth time in my career that I have seen [crude] Prices will drop more than 50% in no time, ”Wirth told CNBC. “We have been here before, we know what to do, we take action.”

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But the language sounds rather optimistic in view of the historical demand worldwide. Morgan Stanley said US GDP could contract a whopping 30 percent in the second quarter. James Bullard, president of the Federal Reserve Bank of St. Louis, said US unemployment could reach 30 percent, a level that was not reached even during the Great Depression in the 1930s.

The aerospace industry is preparing for a nationwide shutdown of virtually all passenger flights for a period of time. While everyone hopes that the global pandemic shutdown is temporary, there will almost certainly be lasting economic scars.

The accumulation of oil stocks to an unprecedented level that is more directly related to the oil industry means that after the worst pandemic passes, oil prices don’t just return more than $ 50.

“The only thing that will help the oil price in the long term is a permanent removal of excess capacity from the markets, which is already starting,” said Commerzbank in a report on Tuesday. “Whether it’s state-owned oil companies, large international energy companies, or US shale oil companies, everyone will soon have to massively reduce their investments.”

On Monday, S & P Ratings lowered the outlook for Chevron’s credit from stable to negative.

The Permian Basin lost 13 oil rigs last week, but since there is usually a delay of several months between large price movements and changes in the number of oil rigs, the worst for the Permian lies ahead.

Schlumberger, the world’s largest oil field service company, announced on Tuesday that it would cut spending by 30 percent this year. The company said the number of U.S. oil rigs could drop below the 2016 Nadir if the Permian oil rigs bottomed below 150 (less than half of the current level) and the total number of U.S. oil rigs fell to around 400, compared to currently 772.

In other words, according to the world’s largest oil field service company, the shale industry will be scrapping hundreds of oil rigs in the coming months. Last week, Halliburton announced plans to take 3,500 workers off.

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ExxonMobil has not yet released its revised spending program, but will likely cut spending as well. Exxon requires oil prices of up to $ 70 a barrel to fund its dividend and meet its costs. The dividend yield is around 10 percent, which many analysts consider unsustainable. Exxon has taken out loans to cover its shareholders’ payouts, but creditworthiness has just been lowered.

There must be something, and Exxon will almost certainly be forced to follow Chevron’s footsteps and limit his Permian operations. Reuters reports that Exxon’s large offshore gas drilling project and the LNG export terminal in Mozambique may be delayed. In addition to offshore drilling in Guyana, LNG in Papua New Guinea and, of course, fracking in the Permian and related petrochemical projects on the Texas coast, Exxon’s East Africa campaign is one of only a handful of flagship projects worldwide for the large corporation.

The Chevron cuts – and probably the upcoming Exxon cuts – are a significant drop from a few weeks ago. Both majors gave their annual investor day presentations just three weeks ago, reaffirming their aggressive drilling and production targets in Perm.

But everything has changed since then. With Brent in the $ 25 per barrel range, around 10 percent of global supply is uneconomical.

By Nick Cunningham of Oilprice.com

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