In budget commentary this morning, Chevron communicated a much bigger cut than expected for 2016 and outlined budget contraction through 2018. Specifically, Chevron plans to cut capital and exploratory expenditures for 2016 to $25-28bn, roughly 25% below 2015 levels. About a month ago, we outlined expectations for a 20%+ reductionin North America E&P spending next year, but global spending contraction has been expected to lag North America. Chevron's news shows global industry contraction next year could be worse than expected.
By 2017-2018, the oil major expects further reductions will take spending down to the $20-24bn level. The low end of this guidance range is approximately half of the company's 2014 budget of $39.8bn.
The massive curtailment of spending wasn't the only jarring news in Chevron's 3Q report. Chevron's total headcount will be reduced by 10%, representing 6-7,000 more O&G job cuts. This is well past trimming the fat - muscle is being cut now.
The only silver lining in the news is that these cuts (and similar cuts in the pipeline from Chevron's peers) will lead to the kind of global oil production response necessary to set the stage for recovery. And deep cuts like this suggest the response will come sooner rather than later.
“We expect capital and exploratory expenditures for 2016 to be $25-28 billion, roughly 25% lower than this year’s budget,” CEO John Watson said. But the Capex cuts will not stop next year. "We expect further reductions in spending for 2017 and 2018, to the $20 to $24 billion range, depending on business conditions at the time....We are focused on improving results by changing outcomes within our control."
As a consequence of this lower investment over the next three years, Watson said, “we anticipate reducing our employee workforce by 6–7,000.” This number is inclusive of the 1,500 layoffs announced earlier this year.
In August, Chevron informed the Houston Workforce Commission that it would start cutting jobs in Houston in October. In late July, the company said it would shed its workforce in Houston by 950 jobs, in addition to 500 jobs at its headquarters in San Ramon, California, 50 international positions and 600 contractor jobs.
In its August notification letter to the Texas Workforce Commission, Chevron said, "In light of the current market environment, Chevron is taking action focused on increasing efficiency, reducing costs and focusing on work that directly supports business priorities."
Stock On Track For Worst Performance In 13 YearsThe decisions were made even as the major reported a quarterly profit that exceeded analysts’ expectations.
Chevron also said it is adhering to previously announced plans to increase production 20% by the end of 2017 and continue dividend payouts to investors, even as low oil prices contribute to the erosion of cash flow for the company.
The second-largest US oil producer's stock is on track for the worst annual performance since 2002- dropping 20% this year so far. Bloomberg observed that "every $1 decline in the average quarterly price of Brent crude reduces Chevron’s cash flow by $325 million to $350 million."