Major Alaska players ConocoPhillips and Oil Search said March 18 that they are reducing global capital spending for 2020, with senior ConocoPhillips taking a more long-range approach and sticking to its current 10-year plan with a 10% cut, while junior Oil Search is taking more aggressive steps to reduce expenditures by 38-44% company-wide.
ConocoPhillips is cutting capital spending just $700 million worldwide from a $7 billion budget, including about $200 million in Alaska and $400 million in the Lower 48 states. In addition, beginning in second quarter, the senior will reduce its plan to buy back shares in 2020 to a quarterly run rate of $250 million, down from the previous run rate of $750 million. The combined moves are expected to reduce 2020 cash use by $2.2 billion.
And while $200 million is a lot of money, it comes out of a huge ConocoPhillips Alaska budget of $3.4 billion for 2020, half the company’s worldwide capex of roughly $7 billion and now $6.3 billion.
Oil Search reduced its 2020 capex in Papua New Guinea to $150-180 million and froze all activity other than maintaining current production; in Alaska where it has no current production the junior is reducing development spending from $120-140 million to $110-130 million and decreasing exploration and evaluation investment from $220-240 million to $150-170 million, for a total of $260-300 million, considerably more than it is spending in PNG.
Early production off the tableIn an investor’s market update conference call March 18, ConocoPhillips said it will trim drilling programs in the Kuparuk River unit and the western North Slope Alpine area, including the laying down of two rigs.
What the reductions mean for Oil Search in Alaska is that while early development activities in the Pikka unit, including laying gravel roads, will be completed, all further work on the early production system for the Pikka Nanushuk development project, including ordering long lead items, is being placed on hold.
Likewise, Oil Search operations on Mitquq 1 and Stirrup 1, the two exploration wells drilled in the 2019/20 winter season, will be completed. Testing of the wells, which both discovered oil, is currently underway, with results expected to be available in late March or early April.
No further exploration activities are now planned to take place in 2020, Oil Search said, which could mean no drilling next winter if market conditions do not improve.
“Limited engineering work” on the Pikka unit full field development will continue, so that the project is ready to move promptly towards final investment decision “when market conditions improve.” Other North Slope expenditures on “seismic acquisition and G&G and G&A costs will be minimized as much as possible,” Oil Search said.
Latest on bringing in partnersAccording to ConocoPhillips executives, the planned sell down of a 25% share in some of the company’s North Slope assets is on track for very late 2020 with a transaction in 2021.
Oil Search has decided to suspend its plans to sell a 15% interest in its Alaska assets. However, the company said, “discussions are continuing with several parties who, due to the quality of the Alaskan assets, continue to express strong interest in a purchase.”
Conoco approach methodical“Our industry is clearly experiencing an unprecedented event brought about by simultaneous supply and demand shocks,” ConocoPhillips Chairman and Chief Executive Ryan Lance said in the March 18 conference call.
“The actions we are now taking reflect an acknowledgement of current events as well as uncertainty around the timing and path of a recovery.”
Lance said ConocoPhillips is in a strong position to take a methodical approach, as it ended 2019 with more than $14 billion in liquidity, including cash, cash equivalents, short-term investments and availability under the senior’s revolving credit facility.
“We continue to monitor market conditions and consider various scenarios to inform any future actions. We have a significant level of flexibility between our capital, operating costs and share repurchase program, but we are choosing to exercise only a portion of it at this time. We believe that the highest-value longer-term response is price-path dependent,” he said.
“If anything, I think we have a greater conviction around our 10-year plan because it really is a philosophy of how to run an E&P business in a volatile market environment. Maybe there are some short-term things that have to change in the volatile market we find ourselves in, but we believe demand will come back and the price will equilibrate back to … what our price was in November. Frankly, if more people would do this, we might not find ourselves in the kind of situation we find ourselves in today,” Lance said.
Creating best, worst case scenariosConocoPhillips is creating several scenarios for the future, including “everything from Russia and the Saudis get back together quickly and get back to some sort of curtailment agreement all the way to a longer, sort of U-shaped recovery and certain various themes in between,” Lance said, describing the company’s base case as a mid-30s average price over the course of this year. “Obviously oil prices in the first quarter were in the 50s and who knows where they will bottom - in the 20s or even lower and maybe some recovery later this year.”
If the senior sees a recovery that takes even longer, then it might take even more advantage of its flexibility in capital spending and its share buyback program, he said.
The next update on ConocoPhillips plans will be in its first quarter conference call on April 30.
Oil Search saw need for immediate actionIn a March 18 capital and operating expenditure reductions and balance sheet update, Oil Search Managing Director Keiran Wulff was quoted as saying that the recent dramatic fall in oil prices due to the impact of COVID-19 on oil demand, “combined with concerns about a material increase in oil production following the recent failed OPEC-plus meeting on further production cuts, has led to a major drop in oil and gas company share prices.”
And that it is “unclear how long these events and the consequent oil price and share market volatility will last.”
“While Oil Search is fortunate to have world class assets, these unprecedented times require us to take immediate and decisive steps to position us for a potentially extended period of lower oil prices and business uncertainty,” Wulff said.
This action will result in a “material reduction in investment expenditure in 2020, from $710-845 million … to $440-530 million. Forecast capital expenditure going forward from April has been reduced from $400-500 million to between $200 million and $300 million,” Wulff said.
Oil Search M&A target?Financial Review reported March 18 that Bernstein Research analyst Neil Beveridge gave credit to Oil Search management for responding swiftly to the new price environment with an “appropriate” reduction in capital spending but pointed to the risk that fresh equity would be needed.
“While free cash flow breakeven has fallen to $32 a barrel it will be impossible for Oil Search to fund growth at current prices,” Beveridge was quoted as saying.
“Either oil prices will have to rise, or an equity raise (will be) required. M&A seems possible given the quality of the assets, which should bring support.”
Financial Review senior resources writer Angela Macdonald-Smith also reported that “Credit Suisse analyst Saul Kavonic this week pointed to Oil Search as an example of a potential M&A target for Woodside that could be preferable to proceeding with its $11 billion Scarborough LNG project in Western Australia.”
Woodside has previously sought to take Oil Search over, making a $11.6 billion approach in September 2015 that was soundly rebuffed. The PNG player now has a market value of $3.7 billion, Financial Review reported.
“WPL could now possibly purchase OSH and Perth Basin interests and achieve a higher return than Scarborough on the same money in our view,” Credit Suisse was quoted as telling clients this week, the article said.
According to Financial Review, Credit Suisse added that it was just using Oil Search “as an example” and that other assets in the region could present alternative or preferable targets.
Note: All dollars in this article are U.S. dollars.