Oil prices have cratered more than 50% from their highs earlier this year following dual shocks to supply and demand. This sell-off has pushed the U.S. oil price benchmark (WTI) to around $30 a barrel, which is a far cry from the $50-a-barrel level that most U.S. producers used as their budget baseline. Because of that, they've had to adjust quickly to this new reality by slashing spending.

Several have made deep budget cuts, which will have a significant impact on their production. These moves, however, will help many to stay afloat during a brutally challenging period for the sector.

An oil drilling rig and pump jack at sunset.

Image source: Getty Images.

Idling America's oil growth engine

Energy companies have poured billions of dollars over the past few years to tap the oil-rich rocks of the Permian Basin. They've transformed it into one of the world's largest oil fields, growing their output so fast that they've outpaced the buildout of the infrastructure needed to support their production.

However, with crude prices cratering due to the dual shockwaves from the COVID-19 outbreak and the collapse of OPEC's market support agreement, oil companies are significantly reducing their activity levels in the region.

Apache (APA -0.74%) is making one of the deepest cuts. Overall, the company slashed its drilling budget by 40%, reducing the range down to $1 billion-$1.2 billion. As a result, the company plans to cease its drilling activities in the Permian in the coming weeks. That's a massive shift for Apache, which discovered an enormous amount of oil and gas in the region a few years ago, leading it to believe it would be the company's primary growth driver. 

Pioneer Natural Resources (PXD 0.20%), likewise, anticipated that the Permian Basin would be its growth engine. That led the company to sell off the rest of its assets so that it could focus on this region. However, with crude prices crashing, Pioneer Natural Resources plans to slash its drilling budget by 45%, bringing the range down to between $1.6 billion-$1.8 billion.

That spending reduction will result in the company cutting its rig count in half over the next two months while reducing its well completion crews from six to between two and three. This significant reduction in activity will cause Pioneer's oil production to level out at an average of 211,000 barrels per day (BPD) -- flat with 2019 -- compared to its initial forecast that it would rise to between 235,000-245,000 (BPD). 

Reducing the breakeven level to around $30 a barrel

EOG Resources (EOG -0.42%) is also cutting back to a maintenance mode this year. The leading shale driller said it would reduce its drilling budget by 31% to a range of $4.3 billion-$4.7 billion. That spending level would provide it with enough money to maintain an oil production level of 446,000-466,000 BPD, roughly flat with last year's level. The company also noted that it could generate enough cash to support this budget, as well as its dividend, at an average oil price in the mid-$30s. 

Pioneer Natural Resources also noted that its reduced spending plan would enable it to operate on the cash flow it can produce in the mid-$30s. Thanks to its oil price hedging contracts, Pioneer estimates that it can generate $500 million in free cash this year if oil averages $35 a barrel for the rest of the year. That will give it the money to support its dividend as well as maintain its top-notch balance sheet.

Occidental Petroleum (OXY -1.26%) has also reset its spending plan to run on the cash flow it can produce at an oil price in the low $30s. These changes have including cutting its capital spending plan by roughly 32% to a range of $3.5 billion-$3.7 billion while slashing its dividend by 86%. Those moves will help prevent Occidental Petroleum's balance sheet from deteriorating any further following its debt-fueled acquisition of Anadarko Petroleum last year.

Shifting to survival mode

U.S. oil companies have abruptly changed their plans. Most have completely shut down their growth engines so that they can make it through this brutally challenging market. Because of that, America's oil output, which has been soaring in recent years, will likely top out and could begin to decline if oil prices don't improve by year's end. That could knock the country off its throne as one of the dominant forces in the global oil industry.