Under IHS low-case scenario, to live within cash flow, spending would have to be reduced by 64% compared with 2015
A new study from IHS says that low oil prices are forcing North American exploration and production companies to make additional significant CAPEX cuts to keep spending more closely in line with cash flow.

According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, which assessed the impact of lower oil and gas prices on 2016 cash flow estimates for the North American E&P peer group, under the IHS low-case scenario, to maintain a capital spending-to-cash-flow ratio in the historical range of approximately 130 per cent, spending for the E&Ps would need to be cut by a further $24 billion, or 30 per cent, from the most recent estimates.
“Our analysis strongly suggests that additional steep spending cuts are required by this peer group of 44 North American E&P companies in order to bring spending in line with lower projected cash flows,” said Paul O’Donnell, principal analyst at IHS Energy and author of the analysis.
This would be a cut of almost 50 per cent from 2015 spending levels.
IHS says the current capital spending estimate for the group totals more than $78 billion, which is 23 per cent lower than an estimated $101 billion in 2015.

“Given that most companies made preliminary 2016 spending plans when the price outlook was comparatively higher, we expect to see further spending cuts announced throughout the fourth-quarter 2015 earnings cycle that reflect the current price environment,” said O’Donnell in a press release.
Under the IHS 2016 low-case price scenario, which assumes $40 per barrel of oil and $2.50 per thousand cubic feet(MCF) of gas, and is closer to current market conditions, IHS projects that the North American E&Ps will spend 188 per cent of cash flow. This projection compares with a ratio of 133 per cent under the IHS 2016 base-case scenario, which assumes a $50 per barrel of oil and $2.75 per MCF.
In the low-case scenario, the large E&Ps are projected to outspend cash flow by the greatest amount, equal to 195 per cent of cash flow. These large E&Ps are the least hedged of the companies studied, making them more exposed to price fluctuations, but they also have the strongest balance sheets, offering a financial cushion, the study says.

Despite their comparatively stronger hedging positions, as noted in the recent IHS hedging analysis, the small E&Ps are projected to spend 174 per cent of cash flow, which “will be problematic since they already have highly leveraged balance sheets and cannot afford further balance sheet deterioration,” O’Donnell said.
“The result could be forced asset sales at bargain prices, sizeable staff layoffs and, in the worst cases, bankruptcies.”
Under the IHS low-case scenario, for the group to show real spending discipline and live within cash flow, annual spending would have to be reduced by at least 64 per cent compared with 2015, or by 42 per cent under the IHS base case assumptions.
“These spending cuts will be particularly troublesome for the highly leveraged companies,” O’Donnell said. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.”
The IHS high-case scenario assumes $60 per barrel of oil and $3 per MCF of gas, but “given current prices,” O’Donnell said, “even our low-case scenario could be generous. Under our low-case scenario, we expect 2016 capital spending for the group will exceed cash flow for all companies, with the large and small peer groups spending 195 percent and 174 per cent of cash flow respectively, compared with a slightly more conservative 157 percent for the midsize E&P companies.”
In this volatile market, IHS said its analysis indicates that Concho Resources, Whiting Petroleum, WPX Energy, Halcón Resources and PDC Energy are displaying the greatest spending discipline.