What happened
Oil prices plunged again today. Brent crude, the global oil benchmark, fell more than 8% by noon EDT on Monday, pushing its price down to around $31 a barrel.
That sell-off in the oil market hit energy stocks hard. Most oil producers sold off on the day, with several oil giants declining by more than 10% at one point in the day. Among those experiencing a double-digit decline were Chevron (CVX 3.88%), BP (BP 4.02%), Royal Dutch Shell (RDS.A +0.00%) (RDS.B +0.00%), Suncor Energy (SU 7.65%), Apache (APA 7.67%), and Occidental Petroleum (OXY 7.11%).
Image source: Getty Images.
So what
The price of oil continued to weaken due to shocks to both demand and supply. The latest demand jolt came when the European Union proposed suspending nonessential travel to Europe for the next 30 days to combat the COVID-19 pandemic. These travel restrictions, which are popping up all over the world, will have a substantial effect on oil consumption in the coming months. They couldn't have come at a worse time for the oil industry, because OPEC had pledged to flood the market with oil after its support agreement with Russia collapsed earlier this month.
The cratering of oil prices is forcing oil companies to take action so that they can survive this slump. Occidental Petroleum already announced that it would slash its dividend by 86%, while also reducing its capital budget range to between $3.5 billion and $3.7 billion, a 32% cut at the midpoint. These moves would enable the company to support its reset dividend and spending plan on the cash flow it can produce at an oil price in the low $30s.
Apache also did something similar, including slashing its dividend by 90% and cutting capital spending by 37%. As a result of that deep investment cut, Apache plans to suspend its drilling operations in the once red-hot Permian basin.
Several other major oil companies are also contemplating making cuts to their spending plan. Reuters reported last week that Chevron is considering reducing its capital spending as well as its production to combat the rout in oil prices. This report came roughly a week after Chevron reaffirmed its long-term spending plan of $19 billion to $24 billion per year through 2024. However, with crude prices crashing, the company will likely adjust its strategy so that it can better align spending with its anticipated cash flow at lower oil pricing levels.
BP, meanwhile, is mulling a capital spending cut of around 20%, according to comments by CEO Brian Gilvary in an interview with Bloomberg. The CEO said that the company sees "negative" oil demand this year with the possibility that oil prices could go even lower. However, BP believes it can still achieve its asset sales target by the middle of next year and isn't contemplating any changes to its dividend.
Royal Dutch Shell and Suncor haven't publicly commented on their capital spending plans. However, given the shellacking in the oil market, both will likely need to reduce their investment spending levels to better align them with anticipated cash flow at lower oil prices.
Now what
The oil market crash is forcing even the largest oil producers to adjust their spending plans. These moves will help better align their operations to current market conditions, helping them stay afloat during this turbulent time. They'll also result in most companies producing less oil than initially expected this year, which will help ease the glut of oil that's starting to flood the market.
