By Jennifer Hiller and Liz Hampton
ODESSA, Texas, Sept 6 (Reuters) - Oil producers and theirsuppliers are cutting budgets, staffs and production goals amida growing consensus of forecasts that oil and gas prices willstay low for several years.
The U.S. has 904 working rigs, down 14% from a year ago, andeven that is probably too many, estimated Harold Hamm, chiefexecutive of shale producer Continental Resources, whichhas reduced the number of rigs at work.
Bankruptcy filings by U.S. energy producers throughmid-August this year have nearly matched the total for the wholeof 2018. A stock index of oil and gas producers hit an all-timelow in August, a sign investors are expecting more troubleahead.
(For a graphic on debt from energy bankruptcy filings byyear, see here https://tmsnrt.rs/2MO7asc )
"You're going to see activity drop across the industry,"Earl Reynolds, CEO of Chaparral Energy, told Reuters atthe EnerCom oil and gas conference last month.
The Oklahoma energy firm has slashed its workforce by nearlya quarter, trimmed its spending plan by 5%, and agreed to sellits headquarters and use some of the proceeds to reduce debt.
Investment bank Cowen & Co estimated last month thatoil-and-gas producers spent 56% of their 2019 budgets throughJune, based on its review of 48 U.S. companies. It expects totalspending this year to fall 11% over last year, based on proposedbudgets.
The slowdown in drilling is spurring cost-cutting inoilfield services, including staff cuts and restructurings attop firms Schlumberger and Halliburton Co. Schlumberger plans awritedown yet to be determined this quarter, noting its resultsin North America have been "under significant pressure," CEOOlivier Le Peuch said on Wednesday.
Halliburton is paring its North American workforce by 8%because of customer spending cuts, and National Oilwell Varcorecently offered buyouts to its U.S. workers.
“The service sector I think is going to be flat," saidSuperior Drilling Services CEO Troy Meier, whose firm canceledplans to add new machinery.
Such signs of a downturn come as the shale sector had juststarted generating the cash flow long demanded by investors, whohave grown weary of drilling expansions without returns. Lastquarter, a group of 29 top publicly-traded producers generatedmore in cash - $26 million - than it spent on drilling anddividends, according to Morningstar data provided bythe Sightline Institute and the Institute for Energy Economicsand Financial Analysis. A year earlier, the same group had spent$2.4 billion more than it generated.
Despite that progress, many small to mid-sized shale firmsare now pulling back on production targets amid the gloomy priceprojections.
A slowing oil industry could weigh on the United Stateseconomy. The boom in shale oil output added about 1 percent toU.S. gross domestic product, or 10% of growth, between 2010 to2015, according to the Federal Reserve Bank of Dallas. In Texas,the center of shale oil production, energy employment dipped 1.8percent in the first six months of 2019, according to the DallasFed. New drilling permits in the state fell 21% in July comparedwith the same month last year, according to state data.
MAJORS STAY THE COURSE
Any broader economic impact, however, could be limited bythe massive investments in shale drilling by some of the world'sbiggest oil firms - Exxon Mobil, Chevron, RoyalDutch Shell and BP PLC. Even as small andmid-sized firms dial back, the majors continue to pour billionsof dollars into years-long shale drilling plans. They haveargued their integrated well-to-refinery networks allow them tocontrol costs enough to withstand a sustained period of lowprices.
Spokespeople for Exxon, Chevron and BP declined to commenton the industry downturn but referred to previous statements oftheir longterm commitment to shale. Shell did not respond torequests for comment.
Chevron has focused much of its production growth plans onshale, and CEO Michael Wirth has called its Permian Basinholdings in West Texas and eastern New Mexico the "highestreturn use of our dollars."
Exxon CEO Darren Woods told a Barclays energy conference onSept. 4 that the company continues to take the long view.
"The way we look at the business is tied to some very basicfundamentals that haven't changed for decades, if not hundredsof years," he said, noting it took oil a century to replace coalas the world's dominant energy source.
Exxon has estimated it can earn a double-digit return in thePermian Basin even if oil falls to $35 a barrel.
BRACING FOR LOW PRICES
U.S. oil prices largely have traded just above $50 a barrelsince last November, requiring higher output to generate thesame profit as when prices were higher. Prices this quarter areabout 18% lower than this time last year, according to U.S.government data.
U.S. oil prices are likely to remain below $55 a barrel forthe next three years, said Scott Sheffield, CEO of PioneerNatural Resources, one of the largest oil producers inthe Permian Basin. Lackluster prices will result in a"significant fallback in Permian growth" and probably "no growthfor most," he said on a recent earnings call.
Part of the slowdown comes as the best drilling spots insome areas of the field are being "exhausted at a very quickrate," Sheffield said.
The severity of the looming downturn is a matter of debate.
Flotek Industries Inc, a supplier of oilfieldchemicals, has cut staff twice this year. CEO John Chisholm toldReuters that the industry is just “pumping the brakes” as itgrapples with well-design issues.
Matt Sallee, a portfolio manager at energy investorsTortoise Capital, expects a longer industry decline.
"It's hard to see how this gets any better for severalquarters," he said.
(Reporting by Jennifer Hiller in Houston and Liz Hampton inDenver; editing by Gary McWilliams and Brian Thevenot)
BP (BP.)
