Big Oil’s Response to the Current Market Environment: Capex Cut Tracker Update

Oil and gas companies, especially upstream revenue exposed companies, have historically adjusted their spending budgets (among other measures) in response to price shocks in commodity markets. The last instance was during the 2014-2015 price decline from average levels above $100 per barrel, after the financial and economic crisis of 2008-2009, to close to $30 per barrel in Q1 2016. Upstream companies adjusted capital expenditure budgets to stay cash flow positive, which in turn led to a broader downturn in ancillary industries such as oilfield services and offshore services.

In 2020, the industry is facing a more complex picture. First, the price crash was not only caused by a self-inflicted supply and demand imbalance as in 2014, but by an exogenous shock from the COVID-19 pandemic and its economic effects across the globe. Second, fast-developing economies such as India and China were already posting below-average growth numbers before the crisis, dampening the demand outlook. Third, there was no orchestrated response to the sudden demand shock, but rather a temporary price war erupted and fourth, absolute price levels were lower and hence the crash cut deeper into cash flow positivity.

This has led to never before seen levels and frequencies of capex reductions across all types of exploration and production companies. The top North America-focused drillers, international oil companies (IOCs) and majors as well as national oil companies (NOCs), have reduced 2020 spending guidance significantly. In addition to capital expenditure reductions, some companies have started to limit investor cash distributions by scaling back (or eliminating) dividends and suspending share buyback programs.

By far, the largest reductions (percentage wise) have come from North America-focused exploration and production companies, which have to manage significant exposure to non-conventional assets that face significantly higher break-even prices, compared to conventional assets.

Spending cuts form NOCs have generally been more measured, as they need to balance investor expectations (seeking capital discipline) and their government’s fiscal policy (reliance on oil and gas revenue to be able to maintain government spending).

Update: As of the May 18, 2020 Capex Cut Tracker update, we have included announced cash distribution changes such as dividend cuts and suspensions and buyback program suspensions.

To provide a comprehensive and timely update on the industry’s response, Duff & Phelps provides a monthly update on its Capex Cut Tracker, which analyzes announced spending cuts for North America-focused, IOCs and majors and NOCs.

To download the latest update, please click here.

Previous Reports

• Capex Cut Tracker Update July 14, 2020
• Capex Cut Tracker Update June 18, 2020
• Capex Cut Tracker Update June 1, 2020
• Capex Cut Tracker Update May 18, 2020
• Capex Cut Tracker Update May 5, 2020
• Capex Cut Tracker Update April 21, 2020
• Capex Cut Tracker Update April 7, 2020

For more information on how Duff & Phelps can assist your company in adjusting to the current environment while protecting value, please contact one of our oil and gas sector professionals.