Oil price war forces Hess to make significant budget cuts to preserve “great investment opportunity” in Guyana

Mar 15, 2020 News

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By Kiana Wilburg

Hess Corporation has announced that it will be making significant cuts to its budget, all in an effort to preserve its “great investment opportunity” in the Stabroek Block.
Its decision comes on the heels of implications from the oil price war between Russia and Saudi Arabia as well as the declining demand for crude as the coronavirus continues to spread.
Specifically making these and other declarations was the company’s Chief Executive Officer (CEO), John Hess during an interview on CNBC.
There, Hess was fielding questions on the oil price war and the hit some American oil companies have taken on their share prices as a result.
The CEO was keen to note that his company is in a very strong position to weather the storm as more than 80 percent of its oil is hedged for this year at US$55 dollars WTI and US$60 dollars Brent.

WHAT IS WTI AND BRENT?
When it comes to physical oil, there are different grades. The most popular traded grades are Brent North Sea Crude (commonly known as Brent Crude) and West Texas Intermediate (commonly known as WTI).
Brent refers to oil that is produced in the Brent oil fields and other sites in the North Sea. Brent Crude’s price is the benchmark for African, European, and Middle Eastern crude oil. The pricing mechanism for Brent dictates the value of roughly two-thirds of the world’s crude oil production. WTI is the benchmark crude for North America. Since both types of oil are used as benchmarks, different countries will use them in different manners.
Asian countries tend to use a mixture of Brent and WTI benchmark prices to value their crude oil. (https://www.thebalance.com/crude-oil-brent-versus-wti-808872)

He revealed that the company would be making an announcement soon, to the effect that it has a major CapEx (Capital Expenditure) reduction planned.
The CEO said, “It doesn’t make sense for any shale producer to drill at US$30 a barrel right now. We will have a major decrease in our Bakken programme in the USA) and in other programmes across the company because right now, every oil company should just hunker down and run for cash.”
Hess added, “…What makes us different than most shale companies in the US is the fact that we have a diversified portfolio. We actually have cash generators in our portfolio, the Deepwater Gulf of Mexico and Malaysia and with the capital budget reductions that we are going to be having in the Bakken, even that becomes a cash generator.”
The CEO said that the goal right now for his company is to “basically to preserve cash, live to fight another day and protect the great investment opportunity we have in Guyana.”
OIL CRISIS
The crisis in the oil market is due to two interrelated factors—fears over the coronavirus and a brewing oil price war between Russia and Saudi Arabia.
Just a few days ago, oil prices saw the most dramatic decline since the financial crisis in 2008. Because of the coronavirus, oil prices which were as high as US$69 a barrel in early January declined to about US$50-US$45 a barrel.
That state of affairs would only get worse following a row that could become an ugly oil price war between Russia and Saudi Arabia.
According to CNN Business, Russia refused a proposal that was made last Friday at a meeting in Vienna by the Organization of the Petroleum Exporting Countries (OPEC) to cut back on the production of oil supply in an attempt to support prices which have been declining due to fears over the coronavirus.
In response to Russia’s refusal, Saudi Arabia over the weekend slashed its selling price for crude by US$6 to US$8 in an effort to retake market share and heap pressure on Russia.
Upon review of the foregoing, international analysts commented that Saudi Arabia is “rolling up its sleeves for a price war.”
The net effect of Saudi Arabia’s actions led to prices dropping to US$34 a barrel.
CNN Business also reported that the shock to oil also rattled stock markets, which were already in a panic because of the novel coronavirus outbreak.
The news agency noted that markets in Asia plunged during Monday’s trading, while US stocks recorded massive declines. In Europe, stocks plunged by 8.5%, while Germany’s was down 7.4% and Italy’s by 7%.
It was also noted that energy stocks were clobbered. ExxonMobil (XOM) and Chevron (CVX) plunged more than 9% apiece, and BP (BP) tumbled 20%. Exploration and production companies suffered even steeper losses: Pioneer Natural Resources (PXD) plummeted more than 30%, while Occidental Petroleum (OXY) lost 40%. (See link for more details: https://edition.cnn.com/2020/03/08/investing/oil-prices-crash-opec-russia-saudi-arabia/index.html).
With the oil price war unraveling before the world, US Investment Bank and Financial Services Company, Goldman Sachs said that oil prices dropping by 43 percent to US$20 a barrel is a real possibility that the market should brace itself for.
S&P Global Platts, the leading independent provider of benchmark prices and analytics for the energy and commodities markets for over 100 years, also noted that oil majors will be under considerable pressure to slash their investment plans and cut shareholder payouts this year in light of tumbling prices.

 

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