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Occidental Petroleum reduces 2020 capex more than 30% on low oil prices

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Occidental Petroleum reduces 2020 capex more than 30% on low oil prices

Highlights

Oxy cuts capex this year to $3.6 billion at midpoint

Eyeing cash flow breakeven level in low $30s/b WTI

EOG willing to 'curtail activity as necessary': RBC

Houston — Occidental Petroleum said Tuesday it will reduce 2020 capital spending roughly 32% at the midpoint of $3.5 billion-$3.7 billion, following a plunge in oil prices this week.

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Oxy will also reduce its quarterly dividend by 86% to 11 cents/share from 79 cents/share, the company said in a statement.

"Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt," Oxy CEO Vicki Hollub said.

"These actions lower our cash flow breakeven level to the low $30s/b WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price," Hollub said.

On Monday, NYMEX crude futures plunged 25% to $31.13/b versus the end-of-last week's close as Russia refused to participate in further oil production cuts proposed by OPEC. That sent markets roiling as nervous upstream producers, mindful of two years of painfully low oil prices in 2015 and especially 2016, to defend their balance sheets by virtually shutting down chunks of their drilling programs.

On Monday, Diamondback Energy and Parsley said they will cut activity this year, and on Tuesday, Marathon Oil and Ovintiv said they would cut 2020 capital budgets.

Also Tuesday, both EOG Resources and Pioneer Natural Resources told RBC Capital Markets they are committed to maintaining strong balance sheets, and EOG "will curtail activity as necessary," according to Monday notes by the investment bank.

DEALING WITH DEBT

Last August, Oxy spent $57 billion to buy Anadarko Petroleum, which beefed up the acquirer's Permian Basin operation in West Texas and New Mexico, and also provided a Gulf of Mexico operation and other assets internationally.

But the mammoth price tag also means Oxy has a lot of debt to pay down. The company pre-sold some assets even before closing the deal last August but closed 2019 with $38.5 billion of long-term net debt.

Slashing the dividend 86% should save Oxy over $2.4 billion in annual dividend payments going forward, KeyBanc analyst Leo Mariani said in a Tuesday investor note.

"[That] will help tremendously with balance sheet management," Mariani said. "However, Oxy still has a lot of debt and won't have free cash flow at $33/b WTI, so additional asset sales will still be critical to reduce its debt burden over time."

Oxy did not provide updated 2020 production guidance Tuesday, but Mariani said he expects to see Oxy's average output of nearly 1.5 million boe/d in Q4 2019 begin to decline in the second half of this year.

E&Ps WILL 'TURN EVERY STONE'

With new price concerns, "Now the E&Ps will turn every stone and cancel every single non-revenue-generating activity," said Audun Martinsen, head of oilfield service research for consultants Rystad Energy. "In the US shale industry as many as 5,800 horizontal wells could be cut in 2020, which would more than halve the number of wells from the 10,900 planned for 2020."

EOG "will evaluate activity at current oil prices," the RBC said. "The dividend remains its priority and [it] will cut activity to maintain its payout."

RBC said EOG told the investment bank "this is not an environment to take a wait-and-see approach."

RBC said it expects "little immediate change to activity" from Pioneer Natural Resources, although the company will closely monitor the macro environment, the bank said.

Even assuming $40/b in 2020, "Pioneer could hold its current 22 rig count and six frac crews and remain below the 0.75X leverage level," RBC said, which is very low. "Management has maintained one of industry's strongest balance sheets to protect against commodity price volatility."

For comparison, banks have required oil companies to maintain leverages of 3.5 times net debt/EBITDA since the industry oil price downturn of 2015-2016, so Pioneer's sub-1X is unusual.