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Continental Resources (CLR +0.00%) recently announced that it's reducing its capital spending plan in a move that's designed to better align its capex spending with its cash flow. However, despite the cut in spending, the company isn't touching its production-growth target, as the spending cut is a result of a huge drop in drilling costs, not financial concerns at the company. This adds Continental Resources to a growing list of companies that have either cut spending or boosted growth as a result of the dramatic drop in industry costs due to the oil-price downturn.
More production, less money
Continental Resources' latest capex revision will see the company reduce spending by $300 million to $350 million in the wake of currently low commodity prices. Off of a $2.7 billion budget, this amounts to an up to 13% cut in spending. Typically, a cut that steep would result in less oil and gas being produced, as the company would be drilling fewer wells.
That, however, isn't the case here as the company's production-growth guidance remains unchanged -- it still expects to grow its production by 19% to 23% above last year's rate. In fact, that growth rate is actually higher than its original estimate of 16% to 20%, as the company boosted its growth rate earlier this year due to cost savings and strong well performance.
Those cost reductions are what's really behind this move. The company is seeing a combination of cost reductions from its vendors, such as service price reductions from oil-field service providers, as well as the fact that the company is becoming more efficient. It's drilling wells faster than ever before, which, when combined with new well-completion techniques, is delivering more production per well. In an industry where time is money, that efficiency is really paying off, as it's driving down costs so much that the company no longer needs to spend as much, as it can get the same amount of production from fewer drilling rigs.
Following the pack
Continental Resources is just the latest company to cut spending without reducing its growth outlook thanks to the dramatic drop in costs. It's joining the likes of ConocoPhillips (COP 0.40%), which recently reduced its capex spending plan by $500 million, to $11 billion, while still maintaining its production-growth target of 2%-3% for the year. In fact, ConocoPhillips has pulled its spending all the way back from the $16 billion it had been averaging, while only reducing its growth from 3%-5% to its current 2%-3% rate. Further, ConocoPhillips said that it could run the company at a mere $8 billion, and keep production flat if commodity prices remain weak for a few more years.
Suncor Energy (SU 0.74%), likewise, recently reduced its 2015 capex plan as it shed $400 million from its budget to bring it down to a range of $5.8 billion to $6.4 billion. Meanwhile, it kept its production-growth target unchanged. What was rather unique about Suncor Energy's capex decision is that it isn't simply using the savings to maintain a solid balance sheet during the downturn. Instead, it has decided to take the excess cash it's now generating, and use it to reinstate its stock buyback program to return this savings to shareholders.
The list goes on from here of the many oil companies that are now enjoying the benefits of lower costs. Each has its own plan of what to do with that savings, with many oil companies actually choosing to reinvest the capex savings back into additional wells to boost growth. That's largely due to the fact that the returns they can earn today are on par with the returns they were earning when oil was much higher.
Investor takeaway
Oil companies are really seeing a dramatic drop in drilling costs, which is enabling them to reduce capex budgets without impacting production. We are seeing companies like Continental Resources, ConocoPhillips, and Suncor Energy simply trim budgets and still deliver on growth targets. Meanwhile, others are choosing to reinvest the proceeds into more wells, which is leading to an acceleration of production growth. While the industry has taken a big hit from lower prices, it's starting to realize some very significant cost savings, which is helping to mute some of the sting from prices.
