The U.S. E&P landscape is shaping up to be a grim place in 2015.

Companies are trimming hundreds of millions to billions of dollars from their budgets as commodity prices hobble the industry’s ability to make money. Huge holes in cash flow will follow, analysts say.

Though WTI prices stubbornly refuse to climb, U.S. production volumes are still forecast to rise 7% next year. The problem is that E&P cash flows could tank by 28%, said J. Marshall Adkins, analyst, Raymond James, in a Dec. 8 report.

With no action by OPEC or other oil-producing countries to address oil prices, Adkins said the market must self correct. Adkins’ view is that the U.S. can address low prices by forgoing growth of 1.5 million barrels of oil per day (bbl/d) in production.

Current 2015 oil price strip levels of $65-$70 WTI during the next 12-18 months should be the right price to slow down growth in U.S. oil production and re-balance the global oil markets in 2016.

Companies are already announcing cutbacks.

ConocoPhillips (NYSE:COP) recently said it would cut its capital budget in 2015 by 20% to $13.5 billion in 2015. Those cuts are mostly a result of the roll-off of major project spending and the deferral of spending on less mature North American unconventionals such as the Permian, Niobrara, Montney and Duvernay.

Development spending will continue to focus on the Eagle Ford and Bakken, said Roger D. Read, senior analyst, Wells Fargo Securities. In spite of reduced spending levels, COP expects production growth of 3% in 2015.

Some companies are already cutting back. Triangle Petroleum (NYSE MKT: TPLM) said Dec. 8 that capex for its fiscal fourth quarter was about $96 million, well below Global Hunter Securities (GHS) $180 million estimate.

TPLM has spent about $404 million year to date compared with its previously provided $670 million budget, said Mike Kelly, GHS analyst. Despite the lower spending, the company beat Wall Street predictions of 12,000 barrels of oil equivalent per day (Mboe/d). The company turned in results of 12.2 Mboe/d.

PDC Energy (NASDAQ: PDCE) also provided guidance saying its 2015 capex will be $557 million, a 14% decrease year over year and 20% below consensus expectations. Nevertheless, it expects production to grow 50% over 2014 volumes.

“While the oil price needed to balance the market is the most pressing question, it is important to note that to get to a balanced oil market, many of our 2015/2016 U.S. oilfield cash flow, activity, and spending assumptions must also change,” Adkins said.

However, if oil prices stick at $70 during the next two years, even with “the pending E&P cash flow deterioration next year, it is important to note that cash flows should stabilize─only down 2%─in 2016,” Adkins said.

Not 1985

Adkins said the pain of this slowdown will not be as prolonged as the oil industry’s collapse in the mid-1980s when Saudi Arabia and its allies tried to increase their share of the oil market.

“The world had built up over 15 million barrels per day of excess oil production capacity by the mid-1980s,” Adkins said. “It took decades of low oil prices to work off those excesses. Today, we have less than 1 million bbl/d of true excess capacity.”

Nor will it be as harsh as the 2009 fallout, Adkins said.

“Before you sell everything tomorrow, remember that in 2009 U.S. E&P cash flows fell by about 40% and the rig count declined closer to 60%,” he said. “We do not expect this downturn to be as severe.”

However, lower U.S. E&P cash flows will change dynamics for many sectors, such as oilfield spending.

Adkins noted that E&Ps reduce oilfield activity either because returns don’t justify the expense of extracting hydrocarbons or the companies are limited by cash flow.

“Even though most U.S. horizontal oil plays still offer attractive returns, even at $70 oil prices oilfield spending will come down commensurately with industry cash flows,” Adkins said.

Rigging

Fort Worth’s Basic Energy Services Inc. (NYSE: BAS) expects significant reductions to its 2015 capital budget focused primarily on maintenance spending, said Dan Leben, senior analyst, Baird Energy.

“On the possibility of a prolonged period of lower oil prices and lower capital spend by customers, Basic Energy Services expects its 2015 capital budget will primarily be deployed toward maintain-and-sustain revenue mode,” Leben said.

The company’s well servicing rig counts remained flat with utilization of 67%. The fluid services truck count increased by 2 to 1,042. Drilling rig utilization was down month to month at 83%.

Adkins said the big three plays are the ones to watch. The Permian Basin, Eagle Ford and Bakken have cumulatively accounted for 96% of crude oil production growth since 2011.

At prices below $70, production from the three plays slows enough such that they are merely offsetting declines in other regions.

By 2016, the only play with material crude supply growth is the Permian at 136 Mbbl/d.

“The remainder of the country is not expected to contribute any growth at all to crude production,” Adkins said.

After a mixed operational update, Matador Resources Co. (NYSE: MTDR) said Dec. 8 it expects to scale back its 2015 Eagle Ford program.

Until the market shakes out, companies will move their pieces on the board to try to stay above water.

Matador announced a mixed operational update with a strong fourth-quarter 2014 oil production of more than of 1 MMbbl, beating analysts' estimates by 3.4%. However, Matador’s gas production of 5.4 billion cubic feet (Bcf) was 10.2% below analysts' expectations.

With two rigs each in the Permian and Eagle Ford, Matador expects to “scale back” its 2015 Eagle Ford drilling program as only six to eight wells need to be drilled to hold acreage. That will likely shift both Eagle Ford rigs to the Permian throughout 2015.

However, rig companies shouldn’t have to pull back to extremes, Adkins said.

The total U.S. rig count will average down about 350 rigs in 2015 compared with 2014. In 2016, average U.S. rig counts will decrease another 170 rigs.

“Despite the decreases in the overall rig count, we expect that the horizontal rig count, which is now a better indicator of U.S. oilfield spending, will hold up slightly better, falling about 13% or 164 rigs in 2015,” Adkins said. As we look forward to 2016, we expect the horizontal rig count to be down 7%, or 78 rigs on average.”

At its worst, rig count should bottom out from peak-to-trough by 609 rigs, or a 32% decrease compared with 2014. By comparison, the 2009 slowdown’s worst rig peak-to-trough decrease was 56%, Adkins said.