By Swetha Gopinath and Amrutha Gayathri
Feb 7 (Reuters) - Less than two months into the year, the
top U.S. shale oil companies have already cut their budget for
2016 a second time as the relentless drop in oil prices
continues to erode their cash flow.
With oil prices firmly wedged in the low $30-per-barrel
range, oil producers are deferring spending on new wells and
projects.
"Companies' language has shifted towards preserving balance
sheets and cash, and keeping expenditure within cash-flows,
which means that budgets are going to fall further," said Topeka
Capital Markets analyst Gabriele Sorbara.
Eighteen of the top 30 U.S. oil companies by output have so
far outlined their spending plans for 2016. They have reduced
their budget by 40 percent on average, steeper than most
analysts' expectations, according to a Reuters analysis.
These 30 companies had, on average, lowered their spending
plans for 2016 by more than 70 percent last year.
Some such as Hess Corp (N:HES) HES.N and ConocoPhillips (N:COP) COP.N ,
who had already planned to spend less this year than in 2015,
have now further cut their capital expenditure targets. Others
are expected to follow suit.
But, is there room for further cuts?
While reduced prices for oilfield services and increased
efficiencies have helped companies scale back spending, many
industry experts say there may not be room for further cuts.
"It's almost like a 80/20 rule - 80 pct of the cost
reduction has already occurred, another 20 percent remains,"
said Rob Thummel, a portfolio manager at Tortoise Capital
Advisors LLC.
Although, the reduced spending has not yet impacted shale
output, production is expected to start falling by the end of
the year.
"The capital cuts that the industry is making should result
in ... a supply shock to the downside," ConocoPhillips' chief
executive, Ryan Lance, said on Thursday.
U.S. crude oil production is expected to decline to 8.5
million barrels per day (mmb/d) in November 2016, from 9.2 mmb/d
in December 2015, according to the U.S. Energy Information
Administration.
Even if the supply cuts lead to a recovery in oil prices,
spending on exploration and production is not expected to bounce
back immediately.
"If you're burning cash during low oil prices - and the
longer that happens, the more pressure on the balance sheet -
that means in a recovery scenario, it's likely going to take
longer for producers to commit to larger capex budgets," said
Fraser McKay, an analyst at energy consultancy Wood Mackenzie.
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Graphic on oil companies' spending http://tmsnrt.rs/1nSktr9
Factbox-Oil producers chop 2016 capex: $56 bln and counting
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