Murphy Oil Corp. and other energy companies are looking at cutbacks as the collapse in oil prices begins to threaten investment in the nation's shale boom.
Stung by crude prices that slipped to a five-year low last week, U.S. energy producers are starting to shut down drilling rigs, lay off employees, and like Murphy Oil, consider reducing capital spending in the coming year.
Companies "want to keep production going and keep selling oil ... but the first thing they are going to do to keep profitable in most businesses is cut some corners and look at staff," said Phillip Streible, senior market strategist for RJO Futures.
ConocoPhillips and Marathon Oil Corp. have said they will operate on reduced -- by about 20 percent -- capital budgets next year. And oil service companies such as Halliburton Co. and Schlumberger Ltd. are planning job cuts.
Murphy Oil won't announce its 2015 budget until next month, but the El Dorado-based driller's lead executive said earlier this month that the company plans to spend less.
"Our [capital expenditures] will be lower," Roger Jenkins, president and chief executive officer of Murphy Oil, said during a conference call. "I think this idea of lowering [capital expenditures] 20-something percent is going to be pretty common in the industry."
Energy companies are responding to crude-oil prices that have fallen more than 45 percent since the summer and have continued to plunge amid a global oil glut.
"It's really happening because nobody knows where the prices are going to stop," said Phil Flynn, an energy analyst with Price Futures Group in Chicago.
Oil prices began to weaken as production from the United States' liquid petroleum-rich-shale plays added to global supply as demand waned with slowing economies in Europe and Asia.
The oversupplied global oil market was further aggravated on Thanksgiving Day when the Organization of the Petroleum Exporting Countries refrained from curbing production levels.
Crude prices have continued to fall and were lower last week than many energy analysts predicted.
Early last week, West Texas Intermediate oil traded under $54 a barrel and Brent crude, the benchmark for most of the world's oil, fell as low as $58 a barrel -- lows not seen in five years. The market recovered slightly Wednesday. Domestic crude closed Friday at $56.22 a barrel on the New York Mercantile Exchange.
Energy industry stock prices have fallen in response to the oil price dip.
Murphy Oil shares fell about 17 percent between Nov. 21 and Tuesday. The company's shares began to rebound Wednesday.
Some analysts say OPEC's move sparked a price war aimed at slowing production at North American shale formations.
"We know OPEC is trying to break the back of the producers," said Flynn. "They seem to believe that these prices are unstable for producers."
The cartel has shown no signs it might consider a production cut.
The United Arab Emirates' energy minister said last week that that country was prepared to ride out low oil prices and that there was no need for an emergency OPEC meeting to deal with them.
Saudi Arabia, the cartel's largest supplier, is also thought to be backing OPEC's policy of maintaining output by continuing with spending plans for social projects and security.
"In a situation like this, it is difficult, if not impossible that the Kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others' shares, at a time in which it is difficult to control prices; thus, we lose the market and lose the prices together," Saudi Arabia Oil Minister Ali Al-Naimi told the Saudi Press Agency on Thursday.
Saudi Arabia, Qatar and Kuwait can sustain lower oil prices longer then most cartel members, analysts said.
But several of the organization's members with weaker economies -- Venezuela, Iraq, Iran, Libya and Algeria -- are struggling with the low crude prices.
Venezuela is on the brink of defaulting, and Iraq, which is fighting the Islamic State, may be forced to review its previous plans to increase oil production, the country's deputy prime minister said last week.
Russia, a non-OPEC member, is also under pressure as low crude oil prices combined with U.S and European sanctions have taken a toll on its economy. The Russian ruble plummeted last week, sending the country's leaders scrambling to fight off a financial crisis.
The weaker-economy countries pushed for a cut in production from Saudi Arabia during the Nov. 27 meeting, but the Saudis balked at bearing the brunt of the cuts.
With OPEC maintaining production levels, U.S. producers are now being tested on what price they can charge for oil and remain profitable.
Flynn said he thinks OPEC enjoys the fact that U.S. shale producers are dealing with lower margins.
"With the price coming down to levels we are seeing right now, the economics of drilling in several areas is being pressed," said Carlos Newall, an equity research associate with Raymond James and Associates.
Newall said Murphy Oil could scale back operations in the Gulf of Mexico and onshore in the Eagle Ford Shale in Texas. But its operations in Malaysia will remain steady.
"You'll see them scale back in the Eagle Ford," Newall said. "The Eagle Ford has incredible economics relative to other onshore U.S. plays, but there is a little bit of pressure."
The Eagle Ford Shale is an area where Murphy Oil has been expanding its operations. The company has about 145,000 acres in the formation.
It was expected by analysts that Murphy Oil would make an acquisition either of land or of another company in the coming months to expand its domestic operations using capital from the sale of some overseas assets.
The company is selling 30 percent of its Malaysian oil and gas assets for $2 billion in cash to PT Pertamina, an Indonesian state energy company. The transaction is expected to close in early 2015.
Murphy Oil has sold its retail gasoline assets in the United Kingdom and is seeking a buyer for its petroleum storage and distribution terminal in the United Kingdom after a previous deal fell through. The company is also closing its Milford Haven refinery in Wales.
However, with the cost of acreage in the Eagle Ford still high, Murphy Oil is likely to put some capital-spending plans on hold since "things are very unpredictable right now," Newall said.
When asked by analysts what Murphy Oil plans to do with the capital now that oil prices are depressed, Jenkins said he was surprised by the continued drop in crude prices but did not rule out the possibility of a future acquisition or share repurchasing plan -- if the price is right.
"I think today you really have to be on the sidelines," he said, adding "a mixture of repurchase and [merger and acquisition activity], I think will still be at the top of the list."
Weak oil prices will spur merger and acquisition activity in the energy industry, analysts said.
"We saw this in natural gas," said Streible. "Private equity firms buy wells, prices fall and the firms go bust, and then other people come in and buy it. That's going to be the same thing that happens with crude."
Companies are starting to halt their investments as the same low oil prices that boosted consumers' wallets now threaten the economy as spending by the industry declines, putting jobs in jeopardy, analysts said.
"Because OPEC is playing this game, it does a lot of damage to the industry over the long run," Flynn said. "We can see by the knee-jerk reactions, that this is happening at a price where it's already damaging to the economy."
OPEC wanted to slow down U.S. shale drilling, and so far, "they are having some early success," he said.
But, Flynn added, "just because you win a few battles, it doesn't mean you win the war."
SundayMonday Business on 12/21/2014