HOUSTON — North America’s oil drillers haven’t sold off nearly as many assets as expected this year but that could change in coming months as executives begin to plan next year’s budgets.
Independent oil producers are likely to cut capital expenditures by 23 percent or more in 2016, and bigger companies could reduce spending 8 percent on average, Wunderlich Securities said Wednesday, extrapolating existing data from the few producers that have disclosed spending plans.
That’s well above a 2 percent spending cut expected by an analyst consensus next year, according to FactSet. And it would follow this year’s 44 percent spending cut by independent drillers, which has so far forced them to idle 1,058 rigs in the United States, lay off thousands of workers and slam the brakes on a domestic energy surge that helped national economic growth after the financial crisis six years ago. Major oil companies cut spending 11 percent this year.
Next year’s smaller oil field investments dash any hopes of a drilling recovery next year, said Irene Haas, a Wunderlich analyst.
“The silver lining is the correction will finally happen in 2016,” she said, noting another round of deep spending cuts next year should bring U.S. crude production down lower than previously expected.
“Without strong oil hedges, easy equity, and bank borrowing capacity, next year will be more challenging even with cost reductions,” Haas and her Wunderlich Securities colleague Jason Wangler wrote.
French oil major Total became one of the first to illustrate how deep oil companies can roll back their investment plans on Wednesday, saying it will reduce capital expenditures to $20 billion to $21 billion next year from $23 billion to $24 billion this year. It plans to cut spending to $17 billion to $19 billion “from 2017 onwards.”
But as oil companies cut deeper into their budgets, they’re also trying to find extra cash to shore up their balance sheets, which are expected to be bruised this year as oil hedges expire and as banks reassess and cut into oil loans they provided when crude prices were higher.
Analysts say one way they’ll raise cash is through asset sales. So far, merger and acquisition activity among North American oil producers has been sparse this year. They’ve made $16.1 billion from asset sales and corporate mergers since the start of the year, well below the $44 billion they sold in the first nine months of 2014, according to Dealogic.
“Anytime you have this sort of (oil price) volatility, the bid-ask spread between buyers and sellers tends to widen, and that wide bid-ask spread has slowed activity,” said Jeff Deitert, an analyst at Simmons & Company International in Houston.
“But as we approach year end and as people look at solidifying their balance sheets, there’s the potential for increased activity,” he said.