Budget Cuts for Shale Producers

Some of the most sturdy U.S. shale producers might be in trouble as they are forced to slash capital expenditure plans in an effort to stay afloat in a world of 30 dollar oil. 2016 is the second straight year of cuts for major shale companies. Three energy companies have recently cut their 2016 capital spending plans all in an attempt to survive the low cost of oil and gas that has lasted for over a year. One of these firms is Oklahoma based Continental Resources, (CLR.) The company said it plans to cut spending by 66% this year to only $920 million, which follows a 46% reduction last year. New York based Hess Corporation, (HES) is also planning a 40% cut following a 29% reduction in 2015. The updated guidance from Hess cuts spending to $2.4 billion from a year ago. “We plan to reduce activity at all of our producing assets,” says COO, Greg Hill. The company plans to pursue further cost reductions while finding efficiency gains over the following year. And finally, Texas based Noble Energy, (NBL) expects to reduce spending by 50% this year, after a 40% cut in 2015. All three of these companies are leaders in the shale industry and have market capitalizations in the billions of dollars each. But in the face of low commodity prices this industry is struggling to get by.

Continental has said in particular that it cannot be profitable at these current oil prices of roughly $32 per barrel. The company says it actually doesn’t expect to be profitable until oil prices rise to at least $37 per barrel. It still has some way to go but it’s entirely possible for oil to reach $37/barrel or higher by the end of this year. It’s been a rough ride for small and medium sized oil and gas producers over the past 6 months. External financing from debt and equity markets slowed significantly in the second half of 2015. Not to mention the fact that OPEC has continued to focus on its strategy to outproduce its competitors in the hopes of gaining oil marketshare around the world. Interestingly however, oil recently began to rally back upwards yesterday as Brent crude rose above $33 per barrel, up more than 20% from its recent lows. Analysts believe this was caused by the new data out from the U.S. Energy Information Administration that showed a jump in weekly demand for products such as heating oil. Unfortunately as with anything weather related, it is doubtful that the rally will continue for any extended period of time. The best hope for shale producers to become more profitable again is to wait for higher oil prices and a stronger overall economy. Many investors who have put money into shale producers a few years ago are now frustrated by the current state of this sector. But all markets have cycles. And those who are patient enough to hold their investments for the long run should try to look past the short term volatility of their stocks.

About the Companies:

Hess Corporation is an exploration and production (E&P) company that develops, produces, purchases, transports and sells crude oil and natural gas. Continental Resources, Inc. is an independent crude oil and natural gas exploration and production company. The Company owns properties in the North, South and East regions of the United States. Noble Energy, Inc. is an independent energy company engaged in crude oil, natural gas and natural gas liquids exploration and production.

This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.

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