More E&P capex cuts ahead? History suggests yes

— Feeling a rising unease over near-term commodity and financial markets, E&P operators have reined in capital spending and scaled back rig counts amid plunging commodity prices and credit fountains that are fast drying up. We're talking a late 2008 scenario, right? Yes and no. These events are in the present, but the above statement could also describe in some parts late 2007, late 2006, late 2001 and going back further, the late 1990s.

Since there is so much information to read and digest daily, it's tough to separate the cornsilk from the corn. Here are some factual kernels: last week giant natural gas industry pacesetter Chesapeake Energy chopped $3.2 billion (17%) off its capex through 2010 and 11% off its rig count, citing lower gas prices. That, according to one analyst, gave industry "license to grow a little slower" in a constricted financial environment. Other E&P operators followed suit: Petrohawk Energy cut 2009 capex by a third while Quicksilver Resources said it would "definitely" cut 2009 and possibly also fourth-quarter spending. Smaller Teton Energy and Sandridge Energy also whacked at their budgets, the latter company slashing half its projected $2 billion in 2009. But upstream companies are veterans of quick responses to market setbacks. In September 2007 when gas prices fell about $2 to the $6/Mcf range, bellwether Chesapeake cut its rig count 10% and shut in 125,000 Mcf/d, or 6% of its net production. Also in late September 2006, the company shut in 100,000 Mcfe/d -- again about 6% of output -- when gas prices tumbled $2 into the $5s/Mcf. Both times, the shut-ins lasted only a month or so. Admittedly, there is a different feel to the market this time around than during periods of simple gas price pullbacks. The 778-point plunge in the Dow on September 29, which wiped out $1.2 trillion of market value, seemed an economic Hiroshima. And the long-term impacts of the US Congress' subsequent decision to prop up the financial system with $700 billion, are extremely uncertain. After all, the granddaddy of hard times, the 1930s Great Depression, officially started October 29, 1929 although it took several years to bottom out. Even into 1930, credit -- which companies use to expand or just stay in business -- remained available at low rates, although companies, fearful of using it, cut back instead. More recently, the Asian economic bubble of the late 1990s caused a global credit crunch, widespread employee layoffs and capex cuts, and soon resulted in oil below $12/barrel (albeit for only about a month) and a global rig count that dropped below 1,200 in April 1999 from just over 2,300 in December 1997, according to Baker Hughes rig data. Industry had begun to recover nicely from that crisis when 9/11 happened and drove oil prices and E&P budgets down again, causing the worldwide rig count -- a barometer of underlying industry fundamentals -- to plummet below 1,600 by April 2002, from 2,333 in August 2001. Despite recent market tremors, many industry executives remain confident so far. In the past week, drillers insisted they have seen no evidence of retrenching activity. Andrew Gould, CEO of oilfield services giant Schlumberger, last week stated the current industry expansion cycle should be "stronger for longer" based on persistent energy undersupply, particularly in developing nations. It should be noted that even while the US subprime lending market was collapsing over the past year and undermining the stock market, the US rig count rose from 1,774 at the start of 2008 to well past 2,000 last month. However, the count has since fallen for the past two weeks to 1,979. All this points to the reason that energy companies recite those tedious "forward-looking statements" at the start of every conference call and presentation: they're saying everything always changes and they must always respond. And vice-versa. The parade of conference calls in the weeks ahead will undoubtedly leave crucial clues on which side of that "vice" the energy industry is headed.