Weekly Oil & Gas Notes: Exxon and Anadarko Announce Spending Cuts

Oil and gas stocks declined this week due to weakness in oil prices. A sharper than expected increase in crude oil inventories in the U.S. weighed on oil prices this week. The Energy Information Administration (EIA) data showed that commercial crude oil inventories in the U.S. increased by 10.3 million barrels during the  week, more than twice as much as expected. Some of the increase in inventories could be attributed to lower refinery operating rates during the week due to seasonal maintenance activities, but it also goes on to show that despite the sharp decline in active oil rigs, U.S. oil production continues to remains robust. This, despite the recent decline in oil prices, is a cause of concern for oil-linked equities, as it could prolong the recovery in oil prices. The price of the front-month Brent crude oil futures contract on the ICE declined by around 3.5% this week and is currently trading around $60.20 per barrel. The NYSE Arca Oil & Gas Index (XOI) fell by almost 3.3% this week. ^[1]

Below, we provide an update on some of the key events that occurred this week related to the oil and gas companies we cover.

Exxon and Anadarko Announce Spending Cuts

ExxonMobil (NYSE:XOM) recently announced its capital spending target for this year. In line with its peers, the company announced a cut in its capital budget in response to the changed crude oil price environment. The company plans to spend $34 billion on leasing rigs, floating oil platforms, installing pipelines, and repairing oil refineries this year, around 12% less than what it did last year. It expects to maintain the same level of annual capital spending through 2017. However, Exxon still maintains its long-term production growth outlook of 4.3 million barrels of oil equivalent per day (MMBOED) by 2017. This year, the company expects its production volume to average 4.1 MMBOED, a growth of 2% from last year, primarily driven by the ramp up of several new projects completed recently. ^[2]

• We currently have a $96 per share price estimate for ExxonMobil, which is around 10% above its current market price. The company’s share price decreased by around 2.5% this week.

See Our Complete Analysis For ExxonMobil

Anadarko Petroleum (NYSE:APC) also announced its capital spending plan for this year. Being an independent oil and gas explorer and producer with no downstream operations, the company announced a sharper 33% cut in its capital budget in response to the recent decline in oil prices. Lower capital expenditures mean lower investment in future production growth. Therefore, while lower capital spending will improve its free cash flows to the firm, we believe it will also slow down the company’s short to medium-term production growth. For example, last year, Anadarko’s crude oil sales volume grew by almost 17% y-o-y, but we expect the increase to be just around 5% this year. While most of its producing assets are still profitable at current oil prices, the company has taken a decision to sacrifice on near-term production growth to maximize returns when oil prices rebound. ^[3]

• We currently have a $77/share price estimate for Anadarko, which is around 5% below its current market price. The company’s share price decreased by around 3% this week.

See Our Complete Analysis For Anadarko Petroleum

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1. U.S. Oil Stockpiles Rise Twice As Much As Expected In Week, reuters.com [↩]
2. ExxonMobil Adds New Production; Continues Long-Term Capital Focus and Investment Discipline, exxonmobil.com [↩]
3. Anadarko Petroleum Cuts 2015 Capital Expenditures By A Third, reuters.com [↩]