Conoco Slashing North American Output in Biggest Oil Cutback

(Bloomberg) -- ConocoPhillips is slashing more than one-fourth of its North American production and halting all U.S. fracking in the continent’s largest pandemic-related oil cutback to date.

The dramatic retrenchment in the company’s biggest-producing region accompanies deep spending reductions and a suspension of Chief Executive Officer Ryan Lance’s prized share-buyback program. Conoco stock fell 3.2% at 11 a.m. in New York trading on a day when oil futures lingered near an 18-year low.

Oil explorers, refiners and shippers around the globe are reeling as the Covid-19 outbreak crushes demand for fuels in a market already saturated with excess supplies. Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. have also taken steps to conserve cash amid the most severe collapse any living oil executives have ever witnessed.

“No one has yet really done what Conoco intends to do,” said Scott Hanold, an analyst at RBC Capital Markets LLC. “We anticipate other industry production curtailments in the coming months.”

Lance told analysts and investors that the 2020 guidance provided just four weeks ago no longer applies. Oil and gas output will be scaled back at the Surmont oil-sands complex in Canada and unspecified fields in the lower 48 U.S. states. All fracking in U.S. shale projects also will be halted.

In total, the cuts amount to the equivalent of 200,000 barrels of Conoco’s daily output, or 27% of the company’s overall North American production, based on data compiled by Bloomberg. The continent accounted for more than half of Conoco’s worldwide output last year, more than any other region.

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More ominously, Lance said U.S. capacity to store crude will be exhausted next month and he foresees “a lot more” production curtailments across the industry. Meanwhile, Chief Financial Officer Don Wallette warned during a conference call that the company may make deeper cuts in June. Fracking probably won’t resume before 2021, COO Matt Fox said during the call.

Texas Crude

Oil prices that were “tolerable” when Conoco first tightened spending last month have mow deteriorated to levels that are “not acceptable,” Wallette said.

As the pandemic’s deleterious impact on demand bloats the supply glut, some Texas explorers and related sectors are advocating for state-imposed output cuts, a move that hasn’t been done in the largest U.S. oil-producing state in almost 50 years.

On a national level, the Trump administration is considering paying drillers to leave crude in the ground for the duration of the rout.

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But unlike larger peers like Exxon and Chevron, which are slowing growth rather than making wholesale output reductions, Conoco is going a step farther.

“These actions reflect our view that near-term oil prices will remain weak, largely due to demand impacts from Covid-19 and continued oil oversupply,” Lance said in a statement Thursday.

Dividend Shield

The new cuts in capital spending, operating costs and share repurchases add $3 billion beyond the $2.2 billion previously announced. The reductions should help protect the company’s dividend, Hanold said.

Conoco’s cuts come about a month after the company first reduced spending and shrank its buyback program. Thursday’s escalation signals the downturn is much worse than initially feared. The buyback was a core part of Lance’s 10-year plan, announced just last November, to be a slow-growth but high return oil company in almost any oil-price environment.

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