In the uninviting prelude to 2016 the oil and gas industry might be beyond belt tightening and ready to try on some form-fitting Spanx.

However, whether such cuts will truly have an impact is debatable. Analysts see varying levels of capex cuts, but uniformly predict spending will head to the shallows.

Majors and large-cap companies have already said they will cut spending.

ConocoPhillips (NYSE: COP) and Chevron Corp. (NYSE: CVX) said they will cut roughly 25% in 2016 capex, representing declines of 55% for ConocoPhillips and 40% for Chevron since 2014, Wells Fargo Securities said.

Encana Corp. (NYSE: ECA), with operations in the Permian and Eagle Ford, said Dec. 14 that its 2016 capital program will fall 25% lower than 2015, or about $600 million.

Huge oil producers such as EOG Resources (NYSE: EOG) set out in 2015 to reduce capex by 42% year-over-year. Newfield Exploration (NYSE: NFX) has planned to hold capex in 2015 to an estimated $1.4 billion.

Jonathan Wolff, an equity analyst for Jefferies LLC, said he is modeling EOG’s drilling and completion capex reductions at 17% and Newfield’s at 27%, largely due to efficiency gains.

“EOG has shown clear leadership in identification of new development areas followed by rapid, efficient development,” Wolff said. “But weak prices and a lack of hedges are a challenge to reinvestment. 2016 capital productivity should be aided by a substantial DUC backlog that is expected to be worked-down in the first half of 2016.”

EOG has said its drilled but uncompleted (DUC) backlog will be about 320 at the end of 2015, compared to a normal backlog in the low 100s, Wolff said.

As a result, drilling activity will fall significantly next year without an increase in oil prices.

Even large spending cuts take some time to reach the oil patch, said Irene O. Haas, an analyst for Wunderlich Securities Inc., adding the oil market will rebalance but “at a glacial pace.”

“U.S. production declines will be more visible in 2016,” she said. “A key factor to figure out is the speed of the non-OPEC supply reduction. In the United States, we saw dramatic capex cuts during 2015, which resulted in a rig count of 737 vs. about 2,000 in the third quarter of 2014. However, there is a huge lag between rig count decreases and an actual production impact.”

Budget Of A Thousand Cuts

Nearly all analysts have some predictions for how capex will fare for U.S. producers in 2016.

Haas said in a Dec. 10 report that U.S. E&Ps might reduce capex by up to 29% in 2016.

“Since our last survey in late September, both 2015 and 2016 capex estimates have come down,” she said. “Largely as a result of efficiency gains, 2015 estimates have decreased another 2% for independent E&Ps in our survey, or about $2 billion.”

For 2016, 42 of 71 surveyed companies provided some form of guidance.

“Of the E&Ps with guidance, the average capex budget is set to decline by 29% in 2016, a bigger decline than the 23% seen in our last survey,” Haas said. “We expect more severe cuts to be announced in the next few months given the continued difficulties in the market.”

Among the survey group, in 2015 spending declined on average by 48% compared to 2014, Haas said.

Wells Fargo Securities predicts that only Pioneer Natural Resources (NYSE: PXD) will increase spending by 29% to $2.9 billion. Among companies it analyzed, Wells Fargo sees capex falling 22%.

While production is slipping and capex is being slashed, it might not be enough. Barclays Capital analyst Thomas Driscoll said he is cutting 2016 estimates again to reflect $50 per barrel (bbl) WTI and $2.75 gas.

Even with an anticipated 2016 capital spending decline of 35% compared to 2015 and 60% overall since 2014, sharp reductions might not slow production enough because of the industry’s ingenuity.

“Flatter production decline curves, lower service costs and improving efficiencies have cut maintenance capital requirements by as much as 50% since 2014,” he said. “We expect oil volumes for the large-cap and SMID E&Ps to be flat in 2016.”

Service companies are also battening down as E&P spending decays.

On Dec. 14, oil service company Calfrac Well Services Ltd. saw its borrowing ability cut from $400 million to $300 million. Calfrac also announced that its capex would drop from $160 million in 2015 to $25 million in 2016. About $30 million in 2016 spending will be carried over from 2015, said John Daniel, analyst with Simmons & Co. International.

Hope And The Alternative

Heading into the New Year, the end of 2015 mirrors its beginning. “Prices are bad, cost cutting is top of mind, and we are still waiting for the M&A wave to happen,” said John England, Deloitte vice chairman, U.S. oil & gas leader.

While cuts have started to slow production, England said that global oil supply increased throughout 2015 led by OPEC nations—up 1 MMbbl/d and the U.S. contribution of 800 Mbbl/d.

Earnings and stock prices fell for all integrated oil companies, upstream independents, oilfield service companies and to a lesser degree, midstream companies, he said.

England said that missing in action was:

  • A large M&A spree;
  • A wave of bankruptcies;
  • Significant declines in U.S. oil production; and
  • A Fed rate hike.

What’s different heading into 2016 is that no one believes prices are going up much any time soon.

“People are battening down the hatches like a hurricane is coming,” he said.

England said he knows that “hope is not a strategy,” but he said some positives are coming down the line.

Consumers might be more inclined to buy new cars or “better yet, a massive SUV.” Auto sale increases would increase demand. China, for instance, is showing strong growth.

Natural reservoir production decline, historically at 4-5% globally, also means that even without demand growth more oil is needed.

“The oil and gas industry must produce another four million barrels per day every year just to keep up with current demand. This naturally puts upward pressure on pricing,” England said.

Along with production declines, billions in investment have been deferred, meaning millions of barrels of oil will not be produced in the years to come.

“This sets the stage for a price rally,” England said.

England also said a leaner, stronger industry will force an “equally powerful innovation in the way oil is being developed and produced.”

“Price forces innovation and I believe we are still in the early stages of what can be achieved in terms of reducing unit costs of oil production and ultimately increasing unit margin and achieving higher return on capital employed,” he said. “The endgame is an oil and gas industry that will be stronger, leaner and built to last.”

Darren Barbee can be reached at dbarbee@hartenergy.com.