Spending cuts announced by oil and gas companies Hess Corp. and Noble Energy Inc. in recent days are likely to be just the first of the sector’s belt-tightening moves, as energy companies struggle amid lower oil prices.
Hess Corp. tumbled the most in almost three years, wiping out $1.5 billion in market valuation, after work at the oil explorer’s most promising international investment was halted by a Venezuelan blockade.
Hess HES, -12.20% on Tuesday announced a 20% cut in its 2016 capital budget to $2.4 billion, on top of the steep cuts made in October. Venezuela, which has long disputed neighboring Guyana’s offshore claims, “aggressively” interrupted the Exxon-led effort to map the sea floor on Dec. 22, U.S.
Although significant for partners Exxon Mobil Corp. and CNOOC Ltd., Hess is particularly dependent on the Guyanese project to generate production growth and cash flow into the next decade.
A day later, the oil producer reported a narrower-than-expected fourth-quarter loss, but its revenue dropped more sharply than Wall Street had expected, to $1.39 billion, from the $1.44 billion forecast by analysts and from $2.53 billion in the year-ago period.
The crew of the Ramform Tethys seismic boat remained aboard, Stenberg said in an interview. Noble Energy NBL, -4.46% meanwhile, said it is halving its own 2016 capital-spending budget to $1.5 billion. Wall Street had expected a budget around $2.3 billion.
“Budget revisions along these lines will be very common in the next couple months, since it is safe to say that any budgets dating back to October or November did not incorporate the prospects of a (oil futures prices) curve in the $30s,” analysts at Raymond James said in a note to clients Tuesday.
Among those to watch: Integrated oil giants Chevron Corp. CVX, -3.09% and Exxon Mobil Corp. XOM, -3.83% are scheduled to report results on Friday and Feb. 2, respectively.
HalliburtonHAL, -2.75% said it had laid off 4,000 workers, and Chief Executive Dave Lesar warned that oil and natural gas companies are projected to cut their spending for the second year.
This year, Lesar was quoted by The Wall Street Journal as saying, will be “a tough slog through the mud.” CNOOC’s American depositary receipts fell 2.1%. An after-hours email to CNOOC’s Hong Kong-based spokeswoman also wasn’t immediately returned.
That mud is the result of a supply glut combined with a slump in worldwide demand. Together, they have kept oil prices under pressure for nearly two years. At current international crude prices, a treasure trove that large would be valued at about $265 billion, according to Bloomberg calculations.
Oil prices plunged nearly 46% in 2014, followed by a 30% drop last year. So far in 2016, prices have slid another 18%. Oil prices CLH6, +0.00% have generally recovered in recent sessions, and oil futures gained on Wednesday as U.S. output slipped.
Earlier this week, talk that OPEC and other oil-producing countries might reach an agreement on output supported prices. Even the more optimistic analysts, however, say a recovery won’t happen until later this year at the earliest. But the slump in demand could continue.
U.S. President Donald Trump’s administration is expected to decide within weeks whether to designate Venezuela a sponsor of terrorism, a move that would further isolate Nicolas Maduro’s regime.
On Wednesday, analysts at Simmons & Co., an investment-banking firm that specializes on the energy sector, reduced their expectations for global oil-demand growth this year to growth of 800,000 barrels a day rather than 1.2 million barrels a day, which it said remains the broad consensus.
Based “on an increasingly broad array of evidence, we believe the bias to consensus demand expectations is lower,” they said.
Given the market environment, oil producers are likely to slash their spending plans by a third or half of their 2015 levels, said Brian Youngberg, an energy analyst with Edward Jones.
Companies are growing more conservative about their use of cash amid the persistent price slump, he said. Youngberg expects oil prices to remain under pressure at least through the second half of the year.
Eventually, the companies’ spending reductions will cut down on production and result in a pickup in demand, he said. Both Chevron and Exxon announced spending cuts late last year, but “there’s always something you can cut further,” Youngberg said. “This is going to be an interesting month.”
“We underscore that Guyana has the sovereign right to explore and exploit resources in its Exclusive Economic Zone,” the U.S. state department’s Palladino wrote.