Parsley Energy, Centennial cut production; lower capex for second time this year

Aggressive Permian Basin producers Parsley Energy and Centennial Resources Development have further pared down near-term production and cut 2020 capex 60% each to bare-bones maintenance levels, owing to lower commodity prices from the global coronavirus pandemic.

Parsley will reduce about 30,000 b/d of net oil volumes, including up to 23,000 b/d that started this month based on near-term regional pricing dynamics in the West Texas/New Mexico basin, Parsley Energy CEO Matt Gallagher said in the company's first-quarter earnings conference call.

That is on top of a previous 5,000 b/d-7,000 b/d of temporarily curtailed 400 higher-cost vertical wells shut down in March that produced 1,000-2,000 b/d of oil, followed in April by closing pads flaring natural gas that produced another 4,000-5,000 b/d oil.

"We're voluntarily curtailing May production to the tune of about 25%," Gallagher said.

The curtailments compare to Q1 oil production of 126,600 b/d, up 41% from Q4 2019 and 61% from the same 2019 period. The company completed an acquisition of Jagged Peak Energy in January 2020.

Parsley's total Q1 oil and gas production averaged 197,000 boe/d, leaving production of 96,600 b/d. The company has also suspended guidance owing to highly volatility and fast-changing market dynamics.

In addition, Centennial has opted to curtail its production in May by up to 40%, or as much as 29,000 boe/d. Thus, in May it will average about 43,100 boe/d of output. By contrast, Centennial produced nearly 72,000 boe/d in Q1.

UNCLEAR IF CUTS EXTEND TO JUNE

Centennial did not say if the cuts will extend into June and, like Parsley, will not provide further guidance until it has more commodity price visibility, Centennial executives said on their Q1 earnings call.

Operationally, both companies have slashed their 2020 capital budgets a second time. Centennial has reduced its capex for the year to $265 million, down 22% from an earlier revised figure, and down about 60% from original guidance.

The company began the year at capex of roughly $675 million, and in March lowered that figure by half to just under $340 million.

As a result of the current commodity price environment and uncertain macro outlook, Centennial recently suspended all drilling and completion work. The company was operating five rigs and two completion crews in early March. It is now running zero rigs.

But the company said its updated guidance provides flexibility to resume "modest operational activity" in second-half 2020, if commodity prices permit.

Moreover, Parsley now has further streamlined its 2020 capex by a further 30%-plus to under $700 million, of which $379 million, or more than 50%, was already spent in Q1.

The company began the year with a $1.7 billion capex and reduced it in March to $1 billion. It also ran 15 rigs in January/February, went to zero recently as prices dipped under $20/b. When prices rise and stabilize above that level, it will go to four to five rigs.

On Monday, NYMEX WTI crude futures were trading in the $24/b range.

'WON'T DRILL THROUGH HEDGEBOOK'

"Our capital allocation philosophy will remain simple: we will not drill through our hedge book, but will evaluate incremental capital investment decisions based on unhedged economics and prevailing market conditions," Gallagher said.

Parsley's baseline capital budget assumption is now based on WTI of $20/b-$30/b for the rest of the year, down from an earlier $30/b-$35/b.

The company, which has championed prorationing -- state output limits placed on producers -- had jointly petitioned the Texas Railroad Commission with another large Permian operator, Pioneer Natural Resources, in March to consider the measure.

But on Tuesday, when the Commission was to render a decision, it appeared no action would be taken, Gallagher said.

The three Commissioners were divided on what should be done. One, Chairman Wayne Christian came out strongly against prorationing while a second, Ryan Sitton who supported prorationing, on Monday declared the measure "dead."

"Parsley was in a position to make a choice about how to manage our volumes, and that choice is clear for us, but some other operators had no choice," Gallagher said.

"Some independent oil producers are having purchasing contracts canceled," he added. "Yet others, not due to market conditions or market signals, are producing at maximum rates to fulfill pipeline commitments or other obligations, compounding a near-term problem."

But Christian and other proration foes claim voluntary output cuts such as Parsley, Centennial and other E&Ps announced in the last week, which total more than 2 million b/d, according to S&P Global Platts Analytics, will work to boost oil prices.

Also cutting production in May by as much as 15% is Diamondback Energy, which will also cut its rig count by more than 60% by the third quarter, CEO Travis Stice said Tuesday.

During its Q1 call, Stice said the company's rig count, now at 14, will be down to 10 by the end of May and eight by the end of the second quarter.

"[That number is] down over 60% from the beginning of the year. We also plan to enter the fourth quarter running seven rigs with the ability to reduce further into 2021," the CEO said.