Exxon output to rise despite cost-cutting

Exxon Mobil CEO Darren Woods, shown last week during a White House meeting of energy-sector leaders, bemoaned the state of oil markets in a conference call Tuesday. “These are definitely challenging times for all of us,” he said.
(AP/Evan Vucci)
Exxon Mobil CEO Darren Woods, shown last week during a White House meeting of energy-sector leaders, bemoaned the state of oil markets in a conference call Tuesday. “These are definitely challenging times for all of us,” he said. (AP/Evan Vucci)

Exxon Mobil Corp. is slashing $10 billion in spending -- more than any other big oil explorer has cut to weather an unprecedented market collapse -- and yet its production in North America's biggest shale region is still forecast to rise.

It's a projection that flies in the face of growing calls for the world's largest oil producers to show restraint as OPEC and its allies prepare for emergency talks this week about arresting free-falling prices. Exxon on Tuesday announced a 30% reduction in capital spending, the second-largest cut in the company's modern history. The stock rose almost 2%.

But despite budget cuts that are twice as deep as any other big company's, Exxon said Permian shale output will still grow to the equivalent of 345,000 barrels a day this year, about 4% below the previous forecast. In 2021, that will jump to about 475,000 barrels.

The world's second-largest oil producer by market value left out of Tuesday's statement any mention of whether the austerity measures will affect its overall global production. But Exxon is prepared to tighten its belt even more should energy markets continue to deteriorate.

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"As market conditions evolve, the company will continue evaluating the impacts of decreased demand on its 2020 production levels as well as longer-term production impacts," the company said.

Exxon, which styles itself a staunch opponent of government intervention in markets, is urging Texas regulators to reject a proposal to cap in-state crude output for the first time in almost half a century. The Texas Railroad Commission is scheduled to discuss the idea on Tuesday and Exxon finds itself at odds with an expanding alliance of small drillers who support the plan.

The big question facing global oil markets right now is whether the U.S. will join Russia, Saudi Arabia and the rest of the OPEC in coordinated production cuts to balance the demand destruction caused by the coronavirus outbreak.

Saudi Arabia and Russia are hammering out terms to a production agreement with OPEC talks planned for Thursday.

Exxon chief executive Darren Woods bemoaned the state of oil markets during a conference call with reporters on Tuesday.

Exxon is in a "capital intensive commodity business that's used to ups and downs in price cycles, however I have to say we haven't seen anything like what we're experiencing today," Woods said. "These are definitely challenging times for all of us."

Saudi Arabia, the world's largest exporter, has made clear that it's not willing to bear the brunt of any cuts alone and wants the U.S., Canada and others to join.

Even as Exxon's production continues, smaller U.S. rivals including Continental Resources Inc. and Texland Petroleum LP are trimming output.

The scope of Exxon's spending cut from $33 billion to $23 billion this year exceeded the expectations of some analysts including those at Goldman Sachs Group Inc. who forecast a reduction to $29 billion. A major liquefied natural gas project in Mozambique will be delayed, as will the third stage of an offshore development in Guyana, while refining and chemical expansions also may be slowed, Exxon said without providing specifics.

Although every oil explorer is grappling with how to manage the price collapse, the pullback is particularly painful for Woods because he so recently staked the future on investing heavily through the downturn.

Royal Dutch Shell Plc, Chevron Corp. and Total SA halted share buybacks to preserve dividend programs. Exxon sacrificed buybacks in 2016 during the last market crash and has instead funneled all excess cash toward dividends and new projects.

Almost 40% of oil and natural gas producers face insolvency within the year if crude prices remain below $30 a barrel, according to a new survey by the Federal Reserve Bank of Kansas City.

Energy companies surveyed during the second half of March said they expect just 61% of companies to remain solvent this year if West Texas Intermediate crude stays below $30. That edges up to a 64% survival rate if prices rise to $40 a barrel, according to a report released Tuesday.

"Expectations for future activity also fell to their lowest level since late 2014, as most firms do not expect energy prices to return to profitable levels this year," said Chad Wilkerson, Oklahoma City Branch executive and an economist at the Kansas City Fed.

The responses echo a similarly negative survey released by the Dallas Federal Reserve last week. While the Dallas bank's district encompasses activity in America's biggest oil-producing state, the Kansas City Fed serves crude-dependent Oklahoma, Wyoming and northern New Mexico.

"The oilfield is generally highly leveraged and these commodity prices will not sustain the bulk of firms in the industry," one unidentified respondent said.

Oil prices have collapsed this year, dipping as low as $19.27 last week, as demand reels from the global coronavirus pandemic and the Saudi-Russia price war. In March alone, crude dropped 54% for the worst monthly decline on record.

On Tuesday, benchmark U.S. crude oil fell $2.45, or 9.4%, to settle at $23.63 per barrel. Brent crude, the international standard, fell $1.18 to $31.87 per barrel.

"We cannot continue producing oil below the cost to produce it," said another respondent.

Information for this article was contributed by Rachel Adams-Heard, Catarina Saraiva and Sheela Tobben of Bloomberg News and by Stan Choe, Alex Veiga and Yuri Kageyama of The Associated Press.

Business on 04/08/2020

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