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Oil & Gas Stock Roundup: Capex & Dividend Cuts Continue in the Hard-Hit Sector

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Nilanjan Choudhury
·8 min read
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It was a week where oil prices slid below $30 a barrel but natural gas settled higher.

On the news front, Occidental Petroleum OXY, Marathon Oil MRO, Cenovus Energy CVE, Devon Energy DVN and Apache APA, among others, lowered their 2020 capital expenditure target to contend with depleted oil prices.

Overall, it was a contrasting week for the sector. While West Texas Intermediate (WTI) crude futures tumbled 23% to close at $31.73 per barrel, natural gas prices gained 9.4% for the week to finish at 1.869 per million Btu (MMBtu).

The crude benchmark notched its biggest weekly loss since the financial crash of 2008, as tensions between Russia and Saudi Arabia combined with continued panic over the spreading coronavirus sent the commodity crashing. Oil fundamentals appear to be struggling under the twin strains of untamed supply from major producers in the face of crumbling demand caused by the world economic slowdown on the back of the virus outbreak

Meanwhile, the oil price plunge is acting as a blessing in disguise for natural gas. The fuel is gaining on expectations of a brake in the skyrocketing shale oil production growth that will also limit associated gas output, thereby cutting the massive supply glut.   

Recap of the Week’s Most Important Stories

1.  In the wake of falling oil prices, Houston-based oil and gas producer Occidental Petroleum announced that the board of directors has decided to slash quarterly dividend by 86% to 11 cents from the present level of 79 cents. To safeguard its liquidity, the company has decided to lower 2020 capital expenditure to the range of $3.5-$3.7 billion from earlier expectation of $5.2-$5.4 billion. It has plans to implement additional measures to cut operating and corporate costs.

The sudden fall in global oil prices and declining demand for crude oil globally due to the outbreak of coronavirus will definitely have an adverse impact on Occidental’s top line. Historically, it remains exposed to market prices of commodities. Although the company has hedged a portion of 2020 oil production, nearly 20% drop in crude oil in the recent past might impact its liquidity.

It's the first time in 30 years that Occidental has decided to cut dividend to ensure enough liquidity to service its debts. The move is essential as the unexpected drop in crude oil price will not generate the desired returns, even if the company hikes crude oil production from its high-quality resources. (Read more: Occidental to Cut Dividend by 86% on Falling Oil Prices)

2.   Reacting to the sudden oil price slump, domestic energy explorer Marathon Oil recently chopped its 2020 capital investment by a minimum of $500 million from the earlier provided capex outlook of $2.4 billion to nearly $1.9 billion, indicating a 30% reduction from the reported capex figure of 2019.

The measures adopted by Marathon Oil for capex cuts will comprise a suspension of its drilling and completion activity in Oklahoma where the company has been operating three rigs and one hydraulic fracturing crew. Further, this Houston, Texas-based company will carry on with its development programs in the Eagle Ford and Bakken at an optimum level and “meaningfully reduce” its drilling and completion activity in the Northern Delaware where it’s overseeing four rigs and one hydraulic fracturing crew. In addition, it will halt any further Resource Play Exploration (REx) drilling and leasing activity by slashing its budget, which was originally set at $200 million for 2020. 

Importantly, the company will continue to keep an eye on the commodity price movement, aligning itself with the capital spending adjustment plans further in response to a volatile price scenario with lowest possible long-term commitments to services and materials. (Read more: Marathon Oil Cuts Capex by 30% to Weather Falling Oil Prices)

3.   Canada’s Cenovus Energy recently announced plan to slash 2020 capital budget by around 32%. Moreover, the company will likely put its crude-by-rail program under temporary suspension, while postponing final investment decisions of some major growth projects. This move was triggered by the recent events in the OPEC+ meeting, which ended up creating a Saudi Arabia-Russia oil price war and pushing oil prices to historical lows.

Per the revised budget, the company is expected to make capital spending of C$0.9-C$1 billion in 2020. The temporary suspension of the crude-by-rail program is expected to halt the usage of credits under Alberta’s Special Production Allowance program. This will likely take a toll on the company’s total production by 5%. Production is now expected within 432-486 thousand barrels of oil equivalent per day. Oil sands production is now expected in the range of 350-400 thousand barrels per day, reflecting 6% fall from the original guidance.

Cenovus’ Christina Lake and Foster Creek projects, which were earlier expected to reach sanction-ready status in 2020, are kept on hold. Capital spending in its Deep Basin and Marten Hills operations is also likely to be suspended. The company will avoid making new projects sanctions owing to low oil price environment. (Read more: Cenovus to Curb Capital Spending in Weak Pricing Environment)

4.   Devon Energy has lowered 2020 capital expenditure by nearly 30% to counter the challenges posed by the sudden decline in commodity prices. The revised expenditure amounts to $1.3 billion, which will allow the company to preserve liquidity.

The planned reduction of nearly $500 million in capital expenditure will be spread across the company’s diversified portfolio, with major cuts directed toward STACK and Power River Basin assets.

The company has hedged around 40% of expected oil production and exposure of the remaining 60% oil production to volatile prices have forced management to cut down capital expenditure plans. In the current low price and demand scenario, it is not advisable to increase oil production assets. (Read more: Devon Energy Cuts 2020 Spending to Preserve Liquidity)

5.   As a response to the sudden oil plunge, Houston, TX-based explorer and producer Apache slashed its quarterly dividend payout by 90% from 25 cents per share to 2.5 cents (effective Mar 12, 2020). Management stated that this calculated action was necessary considering its aim to boost the existing cash position. The move intended to strengthen the company’s financials, will likely lower Apache’s annual dividend distribution by roughly $340 million.

In addition to the trimmed dividend, this independent energy player — carrying a Zacks Rank #2 (Buy)has taken various other measures in response to the oil price drop. Apache chopped its 2020 capital investment and now expects it in the $1-$1.2 billion range compared with its earlier provided capex outlook of $1.6-$1.9 billion.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, Apache plans to limit its rig count in the Permian basin to zero and “meaningfully reduce” its drilling and completion activity in Egypt and the North Sea. The company also focuses on reining in its overhead costs alongside implementing its corporate redesign program. (Read more: Apache Cuts Payout by 90%, Trims Capex View on Oil Price Slump)

Price Performance

The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.

Company

Last Week

Last 6 Months

XOM

-20.1%

-53.2%

CVX

-12.5%

-32.8%

COP

-30.8%

-49.8%

OXY

-45.3%

-70.2%

SLB

-32.2%

-58.9%

RIG

-36.5%

-79.4%

VLO

-20.9%

-39.4%

MPC

-36.3%

-52.5%

 

The Energy Select Sector SPDR – a popular way to track energy companies – fell 24.3% last week. The worst performer was domestic E&P Occidental Petroleum whose stock slumped 45.3%.

Over the past six months, the sector tracker has declined 49%. Offshore driller Transocean Ltd. RIG was the major loser during this period, experiencing a 79.4% price plunge.

What’s Next in the Energy World?

With the price of crude falling to its lowest level in four years, market participants will be closely tracking the regular releases to watch for signs that could indicate a rebound. In this context,  the U.S. government statistics on oil and natural gas – one of the few solid indicators that comes out regularly – and the Baker Hughes data on rig count, will be on the energy traders' radar.

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Transocean Ltd. (RIG) : Free Stock Analysis Report
 
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
 
Apache Corporation (APA) : Free Stock Analysis Report
 
Devon Energy Corporation (DVN) : Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
Cenovus Energy Inc (CVE) : Free Stock Analysis Report
 
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