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'This is certainly different': Oil, gas executives' outlook is ominous

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'This is certainly different': Oil, gas executives' outlook is ominous

The state of oil and gas is just as grim as you would expect.

Executives from some of the biggest oil and gas companies in the world have kicked off the first-quarter earnings season by painting a dire picture of how the coronavirus pandemic has sapped petroleum demand and disrupted their businesses in dramatic fashion.

Those companies have slashed spending plans, laid off workers, idled equipment and increased liquidity where possible. The overnight economic freeze from quarantined households across the country is leading some to lower or suspend guidance and worry over when demand will return.

"This is certainly different, unprecedented when you put the combination of the two things, the OPEC+ falling apart on March 6, together with COVID crushing demand," Kinder Morgan Inc. CEO Steven Kean told analysts covering the pipeline giant on April 22.

Kinder Morgan, which operates a vast network of oil and gas pipelines and terminals, is currently seeing a 40-45% drop in refined products volumes. That drop is reflected in government statistics that show record oil storage builds as refineries scale back operations. Kinder Morgan cut its expansion capital expenditures by $700 million and increased its dividend less than it previously said it would in an attempt to adjust to the collapse.

Olivier Le Peuch, CEO of Schlumberger Ltd., the largest oilfield services company in the world, said the worst is yet to come. "Despite the recent agreement by the world's largest oil producer to cut production, [the second quarter] is likely to be the most uncertain and disruptive quarter that the industry has ever seen," the CEO said on the company's April 17 earnings call.

The company declined to provide second-quarter guidance and outlined a host of responses to the downturn. Schlumberger cut its dividend by 75% to preserve cash, reduced capital investment by 30%, reduced its workforce in North America by close to 1,500 people in the first quarter, implemented furloughs across much of the organization, and reduced compensation for executives and its board.

Schlumberger expects drilling and fracking activity in North America to drop 40% to 60%, given the scale of capex reductions that producers have announced. "This will represent the most severe decline in drilling and completion activity in a single quarter in several decades," Le Peuch said.

Kinder Morgan accounted for that turbulence by lowering its 2020 guidance for distributable cash flow by 10% and adjusted EBITDA by 8%, and it said the numbers could get worse if companies become insolvent.

"While we don't foresee this as a material risk at this point as our assets generally provide critical infrastructure services, we may be exposed to potential credit default events," Kinder Morgan CFO David Michels told analysts. "We did not forecast any of those potential impacts, so if experienced, we could see further pressure on the forecast."

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Jeffrey Allen Miller, president, CEO and chairman of Halliburton Co., summed up the situation in North American shale by saying it is "experiencing the most dramatic and rapid activity decline in recent history." Halliburton slashed its full-year capital spending budget by about 50% from 2019 levels to about $800 million, and it plans to cut about $1 billion of annualized overhead and other costs across the entire business.

"With prices at the wellhead near cash breakeven levels, we expect activity in North America land to further deteriorate during the second quarter and remain depressed through year-end, impacting all basins," Miller said. "This whole period is awful on a lot of different fronts."

Despite the uncertainty, Miller tried to offer some optimism. "If I've learned something from all of the downturns I have been through in my career, it is that the industry always bounces back," he said. "This downturn, although the most severe we have seen in a generation, will be no different."

Each quarter, the oilfield services sector and Kinder Morgan provide the first look at market conditions for oil and gas. Next in the earnings cycle are the integrated oil and gas companies and then producers and pipelines.

In recapping what to look for in the upcoming producer calls, UBS Securities oil and gas analyst Lloyd Byrne highlighted just how different this earnings cycle is for the sector.

"At this point of a normal quarter, we would be focused on positioning, expectations vs. consensus, and/or implications for growth rates. We've received none of those questions," the analyst wrote April 21. "Balance sheet and covenant inquiries remain the focus, although 'reservoir implications' from forced shut-ins (vs. just 'turn-downs') and operational flexibility are increasing."