Oil and gas major Chevron has made a decision to reduce its 2020 capital spending plan by $4 billion thereby joining many of its peers in drastic measures to mitigate the negative effects of the coronavirus pandemic and the recent plunge in oil prices.
Apache, Murphy Oil, ExxonMobil, ConocoPhillips, Noble Energy, Shell, Aker BP, Husky Energy, Total, and Lundin are only some of the operators that have decided to slash their budgets for 2020 as a response to the challenging market situation.
Chevron said on Tuesday it is making several steps as a response to current market conditions.
“With an industry leading balance sheet and a flexible capital program, we believe Chevron is resilient and positioned to withstand this challenging environment,” said Chevron Chairman and CEO, Michael Wirth.
“Given the decline in commodity prices, we are taking actions expected to preserve cash, support our balance sheet strength, lower short-term production, and preserve long-term value.”
The company is reducing its guidance for 2020 organic capital and exploratory spending by 20% to $16 billion. Reductions are expected to occur across the portfolio and it is estimated there will be a reduction of $2 billion in upstream unconventionals, primarily in the Permian Basin; a reduction of $700 million in upstream projects and exploration; a reduction of $500 million in upstream base business spread broadly across our U.S. and international assets; and, a reduction of $800 million in downstream & chemicals and other.
According to Chevron, cash capital and exploratory expenditures are expected to decrease by $3.3 billion to $10.5 billion in 2020.
Total capital and exploratory spending in the second half of 2020 is expected to be about $7 billion, an annual run rate 30% lower than the approved budget announced in December 2019.
Excluding 2020 asset sales and price related contractual effects, the company expects 2020 production to be roughly flat relative to 2019.
Chevron’s net production increases about 20,000 barrels of oil equivalent per day for each $10 movement lower in Brent oil prices due to contractual effects.
Permian production by the end of the year is expected to be about 125,000 barrels of oil equivalent per day, or 20%, below prior guidance.
“The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction,” said Jay Johnson, Executive Vice President of Upstream.
“At the same time, we are focused on completing projects already under construction that will start-up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover.”
Suspension of share repurchases
In addition to reducing capital expenditures, the company is taking other actions to support its balance sheet. These action include the suspension of its $5 billion annual share repurchase program after repurchasing $1.75 billion of shares during the first quarter.
Furthermore, the company completed the sale of its interest in the Malampaya field in the Philippines with proceeds over $500 million received in the first quarter.
In April, the company expects to close the sale of its upstream interests in Azerbaijan and its interest in a related pipeline.
The company continues to execute its plans to reduce run-rate operating costs by more than $1 billion by year-end 2020.
“Chevron’s financial priorities remain unchanged,” said Chevron Chief Financial Officer Pierre Breber.
“Our focus is on protecting the dividend, prioritizing capital that drives long-term value, and supporting the balance sheet.”
Financial & operating results
Recent decreases in commodity prices, as a result of COVID-19 impacts on reduced demand and geopolitical pressures increasing supply, are expected to negatively impact the company’s future financial and operating results.
Due to the rapidly changing environment, there continues to be uncertainty and unpredictability around the impact on results, which could be material, Chevron concluded.
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