Oil sector cutting spending as Wall Street turns its back

[Elderberry]

Houston Chronicle by Jordan Blum July 2, 2019

Rising production. Weakening demand. Skeptical investors.

The U.S. energy sector, while not entering a downturn, is facing an extended period of lower oil prices, lower profits and tighter spending, ultimately leading to slower growth, fewer companies and fewer jobs in Houston and across the oil and gas industry. In less than a year, the fundamentals of energy markets have shifted dramatically, from forecasts of looming shortages to worries about mounting supplies.

Even with OPEC’s agreement this week to extend production cuts into next year, oil markets remain worried about deteriorating global energy demand and record U.S. production. Crude has struggled to break out of the $50-to-$60-a-barrel range, despite heightened tensions in the Middle East and the output reductions by the Organization of the Petroleum Exporting Countries.

Some companies can still make money at those levels, but not enough to fuel significant expansions or satisfy increasingly impatient investors. Wall Street already has turned its back on the sector, unhappy with its lackluster returns but also increasingly focused on challenges to the industry— and earnings — from climate change, renewable energy and electric vehicles.

The S&P Energy index is down more than 16 percent in the past 12 months even as the broaders S&P 500 index has gained 9 percent.

After the the recent oil crash that ended in 2016, the door for funding oil and gas companies was wide open as banks and investors became eager to finance the land rush in West Texas’ booming Permian Basin and get in on the rebound. But the land rush proved costly, and many companies, loaded with debt, have yet to turn a meaningful profit.

“We’ve done pretty much a 180-degree turn,” said Brian Lidsky, senior director at the Austin-based research firm Drillinginfo. “That door started to shut in 2018 and now the lock has been put on.”

Sentiments swing negative

Drilling for oil and gas is a capital intensive business that can burn through billions of dollars to find and develop oil and gas reservoirs, which constantly need to be replaced as they are depleted. As funding tightens, many companies will need to rein in spending, slow projects and trim payrolls. The Dallas oil company Pioneer Natural Resources, for example, recently said it would cuts capital spending more than 10 percent and eliminate one quarter of its workforce — more than 500 jobs — through layoffs and buyouts.

More: https://www.houstonchronicle.com/business/energy/article/Oil-sector-cutting-spending-as-Wall-Street-turns-14065896.php