What happened

Oil prices continued plunging today. WTI, the U.S. oil benchmark, dove another 21%, falling to its lowest level in 18 years. At one point, WTI was within pennies of the $20-a-barrel level, though it did come up a bit from that low, trading slightly above $21 a barrel at 3:00 p.m. EDT on Wednesday. 

The sell-off in the oil market caused energy stocks to nosedive again today, with several tumbling by more than 10%. Among the notable names falling deeply into the red were ConocoPhillips (NYSE:COP)Occidental Petroleum (NYSE:OXY)Pioneer Natural Resources (NYSE:PXD)Devon Energy (NYSE:DVN), and Parsley Energy (NYSE:PE)

Oil pumps with a downward sloping chart in the background.

Image source: Getty Images.

So what

Oil companies are quickly reacting to lower oil prices. Earlier today, ConocoPhillips joined many of its peers in announcing a reduction in its spending level. It trimmed its capital budget by $700 million, or 10%, while also reducing its share repurchase pace from $750 million a quarter to $250 million per quarter. These moves will save the company $2.2 billion in cash this year, allowing it to retain more of its $8.4 billion cash cushion.

ConocoPhillips' spending reduction follows similar moves in recent days by Occidental Petroleum, Pioneer Natural Resources, Devon Energy, and Parsley Energy. In Occidental's case, it slashed its dividend by 86% while also trimming its capital spending plan by 32%. These reductions will align the company's spending level with the cash flows it can produce at an average oil price in the low-$30s.

Pioneer Natural Resources, likewise, adjusted its spending to the cash flows it can produce at an oil price in the $30s. Overall, it cut its drilling budget by 45% to a range of $1.6 billion to $1.8 billion. At that spending range, Pioneer Natural Resources estimates that it could generate $500 million in free cash flow this year if oil averages $35 a barrel. 

Parsley Energy made a similarly deep cut to its spending plan, gutting its budget by 40%. Because of that, Parsley Energy estimates that it can generate $225 million in free cash flow this year if oil averages $30 to $35 a barrel. 

Devon Energy also recently announced a capital spending cut, slashing its budget by $30% to $1.3 billion. The company has the financial flexibility to fund that budget even if crude prices continue falling. That's because it has oil hedging agreements that locked in a floor of $53 a barrel for about 40% of its oil production. On top of that, it had $1.8 billion in cash and expected to receive another $770 million next month when it closes the sale of its Barnett Shale assets. 

Now what

Most oil companies used $50 oil as the baseline for their budgets this year. At the time, that seemed conservative since oil was over $60 a barrel just a few months ago. However, it has cratered since then. It's falling so fast that even these reset plans to run on an oil price in the low-to-mid-$30s seems like a stretch. Because of that, some oil companies might need to cut even deeper so that they don't outspend their cash flow during these challenging times.