ConocoPhillips said it would cut capital spending by 20% next year to $13.5 billion, a sign that major oil companies are treating the plunge in crude prices as more than a temporary dip.
U.S. oil prices hit a fresh five-year low on Monday, falling below $64 a barrel in midday trading, and they are down nearly 40% since this year’s peak in June. The steep drop in prices has come as energy companies prepare their annual budgets, and analysts expect much of the industry to scale back spending as cash flow shrinks.
Houston-based ConocoPhillips is the first of the big, U.S.-based international oil producers to disclose its 2015 spending plans. The company said it would cut back on exploring for new sources of oil and gas, as well as on drilling in some shale formations in North America, including the Niobrara in Colorado.
Ryan Lance, chief executive of ConocoPhillips, said the lower spending “is prudent given the current environment.” The company also will spend less on some of its largest projects that are nearing completion, and estimates it will pump 3% more oil and gas in 2015 than in 2014.
Even if its oil and gas output grows more slowly than in the past, Conoco “is committed to live within its means,” said Roger Read, a Wells Fargo Securities analyst.
Shares of ConocoPhillips, the third-largest U.S. oil producer by revenue, fell more than 3% on Monday as falling crude prices continued to drive shares of oil producers lower.
The collapse in oil prices to the lowest levels in five years leaves oil and gas producers with less money to spend on drilling, dividends and in some cases programs to repurchase their shares.
Analysts at Sanford C. Bernstein on Monday estimated that a 35% drop in oil prices would result in a 25% decrease in industry cash flow. But they forecast that crude prices would eventually rise as companies cut back on drilling.
In the near term, however, less spending by oil producers spells gloom for oil-field service companies and contractors including Schlumberger Ltd. and Transocean Ltd. , whose revenues depend on drilling activity. Halliburton Co. and Baker Hughes Inc. last month agreed to merge, forming the second-largest oil-field services firm after Schlumberger.
Schlumberger, which operates onshore and offshore in 85 countries around the world, said last week that it would be reducing its workforce and retiring some of its seafaring vessels.
“We do expect lower exploration activity levels to carry forward into 2015,” Patrick Schorn, Schlumberger’s president of operations and integration, said at a Cowen and Co. energy conference. He cited “a very strong focus from our customers on short-term cost cutting.”
It isn’t just capital spending that is likely to get trimmed. Analysts who met with Chevron Corp. management last week predicted that the company would spend less on repurchasing its shares. Chevron executives also have expressed a willingness to delay investments in major projects as the company seeks to lower costs.
“Chevron is still in the process of reviewing and evaluating its capital and exploratory expenditure plans and will release its 2015 budget as soon as these plans are final, most likely in early 2015,” Chevron spokesman Kurt Glaubitz said.
By Danial Gilbert. Dan Molinski contributed to this article.