Exxon’s $10 Billion Spending Cut Won’t Stop Shale Oil’s Growth

(Bloomberg) -- Exxon Mobil Corp. is slashing $10 billion in spending -- more than any other supermajor oil explorer has cut to weather an unprecedented market collapse -- and yet its production in North America’s biggest shale region is still forecast to rise.

It’s a projection that flies in the face of growing calls for the world’s largest oil producers to show restraint as OPEC and its allies prepare for emergency talks about arresting free-falling prices this week. Exxon on Tuesday announced a 30% reduction in capital spending, the second-largest cut in the company’s modern history. The stock surged more than 6%.

But despite budget cuts that are twice as deep as any other supermajor’s, Exxon said Permian output will still grow to the equivalent of 345,000 barrels a day this year, about 4% below the previous forecast. In 2021, that will jump to about 475,000 barrels.

The world’s second-largest oil producer by market value left out of Tuesday’s statement any mention of whether the austerity measures will impact its overall global production. But Exxon is prepared to tighten its belt even more should energy markets continue to deteriorate.

“As market conditions evolve, the company will continue evaluating the impacts of decreased demand on its 2020 production levels as well as longer-term production impacts,” the company said.

Free Market

Exxon, which styles itself a staunch opponent of government intervention in markets, is urging Texas regulators to reject a proposal to cap in-state crude output for the first time in almost half a century. The Texas Railroad Commission is scheduled to discuss the idea on April 14 and Exxon finds itself at odds with an expanding alliance of small drillers who support the plan.

The big question facing global oil markets right now is whether the U.S. will join Russia, Saudi Arabia and the rest of the Organization of Petroleum Exporting Countries in coordinated production cuts to balance the massive demand destruction caused by Covid-19.

Exxon Chief Executive Officer Darren Woods bemoaned the terrible state of oil markets during a conference call with reporters on Tuesday.

Exxon is in a “capital intensive commodity business that’s used to ups and downs in price cycles, however I have to say we haven’t seen anything like what we’re experiencing today,” Woods said. “These are definitely challenging times for all of us.”

Global Business

Saudi Arabia, the world’s largest exporter, has made it clear it’s not willing to bear the brunt of any cuts alone and wants the U.S., Canada and others to join.

Even as Exxon’s production juggernaut chugs on, smaller U.S. rivals including Continental Resources Inc. and Texland Petroleum LP are trimmng output.

“Our position has always been one of free markets,” Woods said during the conference call. “It allows the free flow of product, it also ensures that the most efficient producers can continue to produce. Free trade, low trariffs is what’s best for the globe and for our business long term.”

The scope of Exxon’s spending cut from $33 billion to $23 billion this year exceeded the expectations of some analysts including those at Goldman Sachs Group Inc. who forecast a reduction to $29 billion. A major liquefield natural gas project in Mozambique will be delayed, as will the third stage of an offshore development in Guyana, while refining and chemical expansions also may be slowed, Exxon said without providing specifics.

Although every oil explorer is grappling with how to manage the price collapse, the pullback is particularly painful for Woods because he so recently staked the future on investing heavily through the downturn.

To read about Exxon’s internal cost-cutting campaign, click here.

Supermajors Royal Dutch Shell Plc, Chevron Corp. and Total SA halted share buybacks to preserve dividend programs. Exxon sacrificed buybacks in 2016 during the last market crash and has instead funneled all excess cash toward dividends and new projects.

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