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Chevron announces spending cuts and halts buyback programme

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Via Financial Times

US oil group Chevron is to make sweeping cuts to its spending plans for this year and will abandon its $5bn share-buyback programme, saying the move would protect its dividend in the face of collapsing oil prices and the coronavirus hit to global crude demand.

Capex would fall by $4bn, or 20 per cent compared with last year, to $16bn, with half the cuts to fall in the Permian shale, the company said. On an annual run-rate basis, the cuts in upstream spending imposed now will equate to a 30 per cent drop compared with the budget announced in December 2019.

Chevron said it would “continue to execute” plans to reduce operating costs by more than $1bn by the end of the year.

“Maintaining and increasing the dividend is our number one financial priority,” said Mike Wirth, Chevron’s chief executive, in an interview.

But a growth strategy announced three weeks ago that was designed to distribute $75bn to $80bn to shareholders over the next five years will now be pruned back and the payments reduced in light of the collapse in oil prices.

Brent crude, trading at about $27 a barrel, has fallen by almost half since early March, when Chevron announced a number of targets that were scaled back on Tuesday.

The Permian shale, still core to Chevron’s long-term growth plans, will be hardest hit from its capex reduction, with $2bn cut from planned spending in the basin this year. Production would end 2020 at about 500,000 barrels a day of oil equivalent, Mr Wirth said, or about 20 per cent below earlier guidance.

“The market is sending a signal that says it doesn’t need short-term production,” the Chevron chief added. “Our response is to move to our shorter-term and most-responsive asset class, pull the capital down and preserve that cash . . . We will be prepared to increase activity in the Permian when prices recover.”

Mr Wirth said that Chevron’s rig count in the Permian, already down sharply in recent months, would fall to less than half the 16 operating now. “It will be a dramatic reduction in activity from where we were a year ago,” he said.

Suspension of the $5bn annual share buybacks comes after Chevron had already completed $1.8bn worth of repurchases in the first quarter of the year. The company had no timeframe yet on when the programme would be restored, Mr Wirth said.

Chevron said it had raised $500m from the sale of assets in the Philippines in the first quarter and hoped to close the sale of upstream and pipeline interests in Azerbaijan in April.

The announcement of the cuts, which also included a reduction of $800m in the downstream and chemicals business, was welcomed by the market. Chevron’s shares were up 18.4 per cent to $64.23 in midday trade on Tuesday.

Analysts at Tudor, Pickering, Holt & Co, a Texas-based investment bank, said in a note that the “deeper than expected cut highlights [Chevron’s] portfolio flexibility and capital discipline” and rated the stock as a buy. “The clear commitment to protecting the balance sheet, and thus the dividend, in this environment should be rewarded,” they said.

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Despite the capex reduction and cuts to planned output growth in the Permian, overall output from the group would remain flat in 2020, Chevron said.

Mr Wirth said the company was also working with Saudi Arabia to restore production at fields in the Neutral Zone the kingdom shares with Kuwait. The area can produce more than 500,000b/d of oil and was shut five years ago because of a political dispute between the countries.

“The world is well supplied with crude oil, but the kingdom has declared their intention to increase production and their sales,” said Mr Wirth. “I think the restart of the partitioned zone is part of that plan.” Chevron works as a contractor in the zone for Saudi Arabia.

Like other oil producers, Chevron has been battered by a halving of the oil price since early January. Its shares have more than halved since the start of the year. On Monday evening, rating agency S&P revised its outlook for Chevron from negative to stable and cited the company’s “weaker-than-expected performance in 2020” because of the oil-price collapse.

Total and Shell both announced capex cuts on Monday and also suspended their share buyback programmes.

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