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This Oil Stock Is Slamming on the Brakes Amid Lower Oil Prices

Matthew DiLallo, The Motley Fool

Crashing crude prices at the end of 2018 are taking their toll on industry activity levels in 2019. After ramping up spending on drilling new wells last year, oil companies are taking a much more conservative approach to 2019. While some are aiming to keep their activity levels flat, others are slashing spending and slowing their drilling pace.

WPX Energy (NYSE: WPX) is in that latter group. The oil driller initially expected to deliver high-octane growth again in 2019. However, with oil prices crashing in recent months, it's now slamming on the brakes to slow its drilling pace so that it can live within the cash flows it can produce at those lower crude prices.

An oil pump next to some storage tanks.

Image source: Getty Images.

A big downward revision

WPX Energy initially unveiled its 2019 capital plans at the end of October. While crude prices had already come off their high by that time, they've fallen another 20% since then, going from the mid-$60s to the low $50s. That slump in the oil market is forcing WPX Energy to readjust its spending level down to that new price point.

WPX Energy had expected to spend between $1.45 billion and $1.65 billion this year and had identified another $250 million to $350 million of additional reinvestment opportunities such as rig additions, further midstream build-out, land purchases, and greater participation in wells drilled by others. In the company's view, it could finance its base plan with the cash flow it expected to produce at $65 oil while still generating some free cash flow. Meanwhile, it could fund the additional items by selling its interest in two pipeline systems. At the midpoint, that spending level would enable WPX Energy to grow its oil volumes 25% to 30% from 2018's level.

However, with crude now in the low $50s, WPX Energy is cutting its budget back to between $1.1 billion and $1.275 billion, or about 23% lower at the midpoint of both ranges. This budget level will enable the company to live within cash flow at $50 oil. That spending reduction will force the company to cut two rigs from its Permian Basin operations and three in the Bakken Shale, which will cause it to grow production at a slower pace this year. Overall, its output should rise 20% compared to last year's level, though production will only increase between 5% and 10% from the exit rate at the end of last year to the fourth quarter of 2019. In addition to cutting its budget, the company also sold more than $200 million in assets, including its stake in one pipeline, and plans to reinvest about $100 million of that money into acquiring land in a core area of the Permian Basin.

A drilling rig in a field.

Image source: Getty Images.

A disciplined approach

WPX Energy is joining a growing list of oil drillers that are slowing down their growth engines this year in response to lower oil prices. Fellow Permian driller Diamondback Energy (NASDAQ: FANG), for example, plans to invest between $2.35 billion and $2.7 billion in drilling and completing new wells this year. At that spending level, the company can operate 18 to 22 drilling rigs, which is down from the 24 it had running in late December. While that's a high enough activity level to enable Diamondback Energy to grow production 28% compared to last year, it could have expanded output at a faster rate. Instead, it's returning more money to shareholders by boosting its dividend 50% for 2019. Meanwhile, if oil prices fall any further, Diamondback Energy has the flexibility to reduce its rig count to 14, which would enable it to end 2019 producing at the same level at which it exited 2018.

Occidental Petroleum (NYSE: OXY) is also on pace to spend less money this year. The oil giant added $1.1 billion to its budget last year in response to higher oil prices, which put it on track to spend $5 billion. However, Occidental Petroleum is taking a much more flexible approach to spending this year. It set its base plan for $50 oil, which would give it the cash flows to invest between $4.4 billion and $4.5 billion this year so that it could grow production by 8% to 10%. At $60 oil, meanwhile, Occidental could spend as much as $5.3 billion and increase output 11% to 13%.

Quickly adjusting to the new reality

The crash in crude oil to end last year is forcing oil companies to take a much more cautious approach to capital spending this year, since they won't make as much money on those lower oil prices. It's a prudent approach given that wild spending in previous years made matters worse, as it put more downward pressure on both oil prices and the financial profiles of oil companies. That's why it's good to see drillers slow down in early 2019 so that the industry doesn't see a repeat of its previous missteps.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.