March 2020

Responding to the Oil Price fall – how the Majors and IOCs are adapting

Strategies being adopted to Oil companies reassess reduce capital commitments business plans due to include reducing short-cycle activity, Oil companies plan market volatility deferring project sanctions, reducing to reduce capital It is a little over a month since oil and the number of active rigs, focusing gas companies announced FY19 development activity in the lowest expenditure by results and made commitments to cost basins and additional asset $34bn in 2020 protect shareholder returns. Since sales. Most companies signaled then, COVID-19 has been declared that they have the capacity to make a global pandemic, OPEC+ failed deeper cuts if necessary. to agree new output restrictions, Reductions in operating costs Russia and Saudi Arabia opened are also being targeted to lower the taps, and oil prices fell by 50%. cashflow breakevens. A small Companies are having to revisit their number of companies are taking prior plans and guidance. the difficult decisions to reduce In response, oil companies plan headcount. The oil majors have to reduce capital expenditure by pledged to lower operating $34bn in 2020 to improve balance costs by a combined $6.8bn. sheet resilience. The oil majors Some of the majors are in the account for almost a half of the process of reviewing business planned reductions, with $17bn of plans and therefore the scale of cuts announced so far, representing both operating cost and capital Companies a 20% decline compared to expenditure reductions will likely reiterated their previous guidance. Collectively, increase. Several companies commitment to 20 North American independents indicated that they would provide intend to lower capital spending further detail of the actions they climate-related by $15.5bn this year. However, are taking to drive down costs when emissions while some of these companies they present their results for the first are making modest cuts of 10%, quarter of 2020. reductions most are proposing cuts of 30% targets or more. European and Australian independents are also responding to the lower oil price environment and plan to reduce capital investment by $1.8bn. March 2020

Due to actions taken during the previous oil price downturn in 2014, many companies have stated they are now more resilient to lower oil prices. They have stronger balance sheets and lower debt levels. While noting the seriousness of the current situation, several CEOs asserted that their organizations had survived previous downturns and said that they would take the necessary measures to ensure they weathered the current challenging conditions. Importantly several companies reiterated their commitment to climate- related emissions reductions targets despite the tough macro environment. The majority of European, The third lever companies are Canadian and Australian players using to curtail costs is revisiting directly addressed COVID-19 commitments to short-term concerns in their action plans, shareholder distributions compared to only a single US that were made at higher oil independent. The health and prices. The oil majors that have well-being of their employees and made announcements about customers were at the forefront their response to the tougher of statements about actions they market conditions have all said were taking to navigate through this The majority they are suspending previously period of heightened volatility. They of European, communicated share buyback also reiterated that safety remained programs or withdrawing proposals an over-riding priority. Some Canadian and for share buyback schemes. Several outlined how they were adapting Australian players North American independents have work practices to maintain oil and also announced that share buybacks gas production in regions where directly addressed or dividends will be suspended or Shareholders could miss social distancing restrictions are in COVID-19 reduced. force. concerns in their out on returns totaling $7.6bn if market conditions do not improve action plans over the course of 2020.

Patrick Handley Simon Maine Will Medvei Partner Partner Partner [email protected] [email protected] [email protected] March 2020

Announced actions in response to low oil price environment

Share Capex Opex buyback Dividend Dividend reduction reduction suspension reduction suspension IOCs

BP plc Chevron Corporation    Eni S.p.A.    Equinor ASA    ExxonMobil Corporation Repsol S.A.    Royal Dutch Shell plc    Total S.A.   

North American Independents

Apache Corporation   Canadian Natural Resources Ltd.   Chesapeake Energy Corporation  Concho Resources Inc.  ConocoPhillips  Continental Resources Inc.  Devon Energy Corporation  EOG Resources Inc.  Hess Corporation  Husky Energy   Marathon Oil Corporation  Murphy Oil Corporation  Noble Energy Inc.   Occidental Petroleum Corporation   Ovintiv Inc. (formerly EnCana)   Pioneer Natural Resources  QEP Resources Inc.  Whiting Petroleum Corporation  WPX Energy Inc. 

Source: Company statements