W&T, Kosmos slash capex by double-digit percentages, but still have cash flow at low prices

Houston — Offshore producers, like those onshore, are slowing down operations amid low crude prices and uncertain oil demand, but unlike their shale-focused peers can more easily keep production flat, two Gulf of Mexico upstream operators said Tuesday.

W&T Offshore and Kosmos Energy are both chopping at their 2020 capital budgets by double-digit percentages and slowing or deferring projects, those companies said in respective statements.

But they can remain profitable, cash flow neutral or positive, and fund their obligations at low oil prices that in W&T's case, is less than current levels.

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On Tuesday, NYMEX front-month crude futures settled at $26.95/b, down $1.75.

W&T, a pure-play US Gulf operator, has made the larger cut percentage-wise to its projected 2020 capex that it unveiled barely two weeks ago of $50 million-$100 million.

But now, it will reduce spending this year by 73% at midpoint to $15 million-$25 million, company CEO Tracy Krohn said.

But W&T did not change its 2020 production guidance of 47,100 boe/d-52,100 boe/d, and Krohn said little impact on oil and gas output is expected.

LITTLE IMPACT ON 2020 OUTPUT DESPITE CUTS

"Because of the low decline profile of our conventional asset portfolio in the Gulf of Mexico, the [capex cut] has minimal impact on our expected production in 2020," he said.

"At the midpoint of our updated 2020 capital budget, we expect to remain cash flow positive at or above $25/b oil and $1.50/Mcf natural gas," he added.

Recently, the company procured Henry Hub costless collars on 40,000 Mcf/d of its production to protect more of its cash flow from future downward price pressure while still being able to capture upside gains, Krohn said. W&T also has hedges on 20,000 b/d of its oil outputs this year for each of January-May and June-December.

Unlike shale production, which declines as much as 70% in the first year, offshore wells are more conventional and have a lower-decline, longer-production profile.

Also, W&T reduced its planned asset retirement expenses to $10 million-$20 million, instead of $15 million-$25 million. Other than that, the company is sticking to all other original gudiance.

In addition, Kosmos Energy said it will reduce its originally planned $325 million-$375 million capex by about 30% to about $245 million.

The reduced spending level will keep 2020 production "flat, in line with previous guidance and with minimal expected impact on 2021 production," Kosmos said.

OVER $100 MILLION OF US GULF DISCRETIONARY SPENDING

"We have identified over $100 million of discretionary expenditures largely related to exploration activities in the Gulf of Mexico and our basin-opening exploration portfolio," the company said.

The company also plans to dial in cost reductions this year of over $60 million of savings from operating and general/administrative expenses. It is targeting a $1/boe reduction with no impact to asset integrity or near-term production.

Kosmos' head count will be reduced by an unnamed amount. The company plans to suspend cash bonuses for employees this year, and will also suspended the dividend after the Q4 2019 payment "until market conditions improve," it said – a move that will save roughly $75 million/year.

Those steps plus its hedges should set up Kosmos to be free cash flow neutral starting in Q2 and fund all its obligations at $35/b Brent.

Although neither W&T nor Kosmos gave details on which projects might get deferred and which will continue, US Gulf pure-play Talos hinted last week during its Q4 earnings call that in general, activities that contribute to near-term production and with it, cash flow, are those that likely receive funding this year.

Kosmos also said it is working with operator BP to defer 2020 capital spending for the Tortue Phase 1 project offshore Mauritania and Senegal, where final investment decision was taken in December 2018 and startup is slated for 2022.

"[The goal is] extending the carry of our capital obligations through the end of this year," for the project, Kosmos said.