What happened
Oil prices continued to swing wildly following Monday's historic plunge. By 11:15 a.m. EDT on Wednesday, WTI, the U.S. oil benchmark, had declined by about 3%, giving up some of yesterday's gains.
That renewed slump in oil prices, as well as some company-specific news, is weighing on energy stocks today, with several tumbling more than 10%. Among the notable names experiencing significant declines were Occidental Petroleum (OXY +2.66%), Matador Resources (MTDR +2.34%), Laredo Petroleum (LPI +0.00%), Apache (APA +4.76%), and WPX Energy (WPX +0.00%).
Image source: Getty Images.
So what
For the most part, oil price volatility is the main issue weighing on these oil producers, which all focus on the Permian Basin. With oil prices falling into the low $30s, these companies are forced to take action to protect their cash flow and balance sheets. Occidental Petroleum did that yesterday by slashing both its dividend and capital spending plan. Under its new operating strategy, the company can finance its reset dividend and reduced drilling budget with the cash flow it can produce at an average oil price in the low $30s.
Matador Resources made a similar announcement today. The company said it would cut its rig count in half by the end of June. In addition, several company executives took pay cuts, including a 25% reduction for CEO Joseph Foran. It will also target other expense reductions, as well as non-core asset sales so that it can better withstand lower oil prices.
Other drillers will likely make similar moves. Laredo Petroleum, for example, announced its 2020 budget and three-year outlook late last month. At the time, the company expected to invest $450 million per year, which it could finance with cash flow assuming oil averaged $50 a barrel. However, with crude now well below that level, it will need to slash spending so that it can live within cash flow.
Apache also recently released its 2020 game plan. At the time, it expected to invest between $1.6 billion to $1.9 billion, which would be 26% below last year's level. However, with oil cratering since then, it will need to cut spending even further to keep it in line with cash flow.
WPX Energy just closed its acquisition of Felix Energy this month. That deal was supposed to enable it to produce enough money at $50 oil to finance its drilling budget with $200 million to spare. While it does have oil hedging contracts in place protecting about 70% of its cash flow this year, it will still likely need to cut spending so that it doesn't start digging itself into more debt.
Now what
OPEC blindsided the U.S. oil industry last week after the group and its non-member partners couldn't agree on a solution to support the oil market. U.S. producers are getting caught in the middle of the ensuing price war and must make drastic changes so that they can endure what might be a long fight.
