Devon Energy joins other companies to announce capital expenditure cuts as oil price war, demand worries grow
The U.S. Energy Information Administration is already predicting a production decline in crude domestically in 2021.
The predicted decline could grow as exploration and production companies across the nation’s prolific shale plays continue announcing cutbacks in reaction to geopolitical events and viral fears, and the decline could happen sooner than expected.
Oklahoma City-based Devon Energy is among dozens of companies so far to announce cuts to capital expenditures for the year.
Devon is cutting its capital outlay by a half-billion dollars, equating to a 30% reduction on what it previously expected to spend.
“With the challenging industry conditions, we are committed to taking decisive actions to protect our balance sheet and preserve liquidity,” Dave Hager, Devon’s CEO, stated as part of the announcement.
Devon stated the cut resets its expected capital expenditures for the year at $1.3 billion.
While cuts will be spread across its portfolio of operational areas, Devon's STACK and Powder River Basin assets would be cut the most proportionally, while the company focuses on developing assets in the Eagle Ford and Delaware Basin fields, according to officials.
Devon will issue additional updates about ongoing plans when it reports its operational and financial results for the first quarter later this year, officials said.
The company entered 2020 with $1.8 billion of cash, available credit of $3 billion and no pending long term debt retirement due until the end of 2025.
Additionally, Devon has commodity derivatives measures in place that protect more than 40% of its estimated oil production for the year at a floor price of $53 a barrel.
Devon will also get a cash infusion of $770 million when its deal to sell Barnett Shale assets to Banpu Kalnin Ventures closes in April.
“We have substantial flexibility with our service contracts, allowing us to quickly recalibrate activity to balance capital investment with cash flow,” Hager stated.
“This advantage, combined with our high-quality asset base and excellent liquidity, positions Devon as well as anyone in the E&P space to navigate through this period of extreme commodity price volatility.”
On Wednesday afternoon, Enverus updated its outlook on what the future holds for global oil demand and production and how ongoing concerns about oversupply issues and the coronavirus are impacting the energy industry here at home.
Bill Farren-Price, a director at Enverus subsidiary RS Energy Group, discussed the breakdown of a relationship that lasted several years between the Organization of Petroleum Exporting Countries and Russia in an attempt to balance supplies with demand to support crude’s global price.
Farren-Price warned there probably won’t be a quick resolution, either.
“The million-dollar question is: How long will the price war endure? This is not going to be something that is quickly reversed.”
Still, Farren-Price and Bernadette Johnson, Enverus’ vice president of market intelligence, both indicated they believe growth in global oil demand will return beyond 2021. Johnson also discussed how demand declines, coronavirus fears and the price war between Russia and OPEC are impacting U.S. producers right now.
Current pricing for crude doesn’t achieve breakeven rates for most producers in most basins, Johnson observed.
While she doesn’t expect to see a massive decline in the numbers of drilling rigs operating immediately, it wouldn’t surprise her if the national count fell to as few as 600 later this summer while numbers of drilled, uncompleted wells climbs.
Meanwhile, she noted that oil-field services companies that already had slashed the number of working crews by 20% in 2019 compared to the previous year likely will see additional cuts much sooner than June.
“Shale is not dead,” Johnson said, remarking that companies that are cutting today but are able to survive can ramp back up when prices are better, the same as they did the last half of 2016.
“The market is essentially working the way it is supposed to.”
Predictions released by the EIA earlier this month touch on many of the points Enverus outlined Wednesday.
The agency stated it expected the average daily production of U.S. crude oil would be 13 million barrels this year, with it growing through May and then tailing off the remainder of the year.
If that were to hold, the average daily production would be 800,000 barrels more than it was in 2019 (Enverus, however, puts that growth number at 260,000 and likely will revise it lower, based on information it continues to gather from the publicly traded companies it follows).
The agency predicts average domestic daily production of crude in 2021 will fall to 12.7 million barrels because of lower market prices for the commodity.
If that holds, it will mark the first time crude production has declined in the U.S. since 2016, agency officials said.