One after the other, the top integrated oil and gas majors are unveiling plans for sweeping spending cuts to preserve cash and defend their bottom lines from oil prices that have tanked roughly 60% since the start of the year.
Chevron Corp. entered the oil price collapse with one of the strongest balance sheets in the sector, and when the dust eventually settles, analysts believe that the second-largest U.S. oil company is poised to be best positioned of the majors to ride out the storm.
Following March 23 announcements by Royal Dutch Shell PLC and Total SA that they would cut capital expenditures and delay stock buybacks, Chevron announced March 24 its own plan to slash spending and costs to help it get through what could be shaping up to be a protracted period of sub-$30-per-barrel oil prices. Exxon Mobil Corp. announced March 16 that it plans to "significantly reduce" its 2020 spending, and while they did not specify a sum, analysts suggested the Exxon capex cuts could exceed all others.
"We find it remarkable the companies were able to reduce capital budgets ranging from $18 [billion to] $25 billion in a matter of weeks, but desperate times call for desperate measures," Jefferies analyst Jason Gammel said in a March 24 note to clients.
Chevron will cut its 2020 capex by $4 billion, or about 20%, to $16 billion and aims to reduce cash capital and exploratory expenditures by $3.3 billion, to $10.5 billion. The U.S. supermajor also said it will halt its $5 billion share buyback program and will slice run-rate operating costs by more than $1 billion by the end of the year.
"While the cuts don't completely close the post-dividend outspend, the clear commitment to protecting the balance sheet, and thus the dividend, in this environment should be rewarded and we continue to see Chevron as best positioned to weather this downturn," Tudor Pickering Holt & Co. said in a March 24 note to clients.
A big part of Chevron's new capex plan involves putting the brakes on its ongoing expansion efforts in one of the world's hottest plays, the U.S. Permian Basin. The company has reduced its Permian production guidance by 125,000 barrels of oil equivalent per day, or 20%, since it will trim spending in the region by 50% this year from $4 billion to $2 billion.
"The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction," Chevron Executive Vice President of Upstream Jay Johnson said. "At the same time, we are focused on completing projects already under construction that will start up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover."
Chevron has been expanding its footprint in the Permian over the last few years and had expected its production in the region to hit 1.2 million boe/d by 2024, executives said in early March at the company's annual investor day. Chevron had anticipated that Permian output would reach 600,000 boe/d this year and 900,000 boe/d in 2023. In the fourth quarter of 2019, Chevron's unconventional Permian production was 514,000 boe/d.
While the integrated majors as a whole should be able to preserve dividends this year, returns to shareholders could be trimmed in 2021 should oil prices remain weak for an extended period, analysts from SunTrust Robinson Humphrey and Berenberg said.
"In the event that oil prices stay low through 2021, then we would expect pressure on dividends to rise as gearing heads towards levels that companies feel are unsustainable," Berenberg analyst Henry Tarr said in a March 24 note. Gearing is a company's ratio of debt to equity.