A major contraction is underway across North America’s natural gas and oil industry from Covid-19 and unyielding commodity prices, and operators are responding in every way possible to sow the seeds of an eventual recovery.

Houston-based Apache Corp. earlier in March reduced capital expenditures, cut the dividend and began to lay down all of its Permian Basin rigs. While harsh, the cutbacks should deliver an annualized cash cost reduction of more than $300 million, double the original target, in general/administrative and lease operating expenses, management said Wednesday.

About $225 million of the identified savings, including the impact of severance and reorganization costs, are likely to be achieved this year. The organizational redesign effort to streamline the business and improve operational efficiencies, took effect on Wednesday.

“We have made substantial progress on our organizational redesign initiative, which began in the fall of 2019,” CEO John J. Christmann said. “This is enabling more flexible resource allocation and increased collaboration while delivering cost savings that are critical in the current environment.

“Together with our talented team members and diverse asset portfolio, our new organizational structure is already enabling Apache to be more agile and respond quickly to changing commodity price environments.”

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‘Worst Crisis’ In A Century

Meanwhile, Brazil’s supermajor Petróleo Brasileiro SA, which last month cut capex to $8.5 billion from $12 billion, on Wednesday adopted even more austerity measures. Petrobras, as it is known, said the “current scenario is marked by an unprecedented combination of an abrupt fall in the price of oil, a surplus in the market and a strong contraction in global demand for oil and fuels. These new measures involve reducing oil production, postponing cash disbursements and reducing costs.”

Beginning Wednesday, oil production has been cut by 200,000 b/d, with the duration of the restriction “continuously assessed.”

To achieve an announced $2 billion reduction in operating expenses this year, Petrobras among other things plans to trim $700 million in personnel costs. Among other things, monthly remunerations are to be reduced by 10-30% for managers, coordinators, consultants and supervisors. 

In addition, workdays have been reduced at Petrobras to six hours from eight hours for around 21,000 employees. There also has been change from “shift and alert systems” to the administrative regime for around 3,200 employees.

The Petrobras board also has approved postponing to September 30% of remuneration for April through June. Last month, 30% of the monthly remuneration for the CEO, executive team and general managers was postponed.

Once Again Reassessing

The pain inflicted on exploration and production operators has, as expected, cascaded into the oilfield services sector.

Tulsa-based drilling rig expert Helmerich & Payne Inc. (H&P) on Tuesday implemented more spending cuts after beginning a wave of cost reductions last month. 

“In light of the uncertainties related to Covid-19 and the significant negative impact that a weakened commodity price environment have had on the outlook for the industry rig count, H&P has preliminarily reassessed certain portions of its cost structure,” CEO John Lindsay said. 
Capex would be reduced along with selling, general and administrative expenses through the remaining six months of fiscal year (FY) 2020.

Gross capex now is set at $210-230 million for the year. The budget still includes funds for “walking rig conversions backed by term contracts and certain in-process corporate projects, including information technology initiatives,” Lindsay said.

In the last half of FY2020, H&P’s capex primarily would consist of maintenance spend at an annual level that averages around $1 million/active rig. There also are asset sales totaling $25-35 million planned that are to include reimbursements for lost/damaged tubulars and sales of other used drilling equipment.

H&P also has reduced future quarterly dividends to 25 cents/share. The planned 71 cent/share payout set for June 1 was reaffirmed, however.

Lindsay commended the workforce for responding to “challenging times” brought about due to the pandemic.

“The company is an ‘essential critical infrastructure’ company as defined by the Department of Homeland Security and the Cybersecurity and Infrastructure Security Agency,” he noted, “and as such, continues to operate rigs and technology solutions, providing valuable services to our customers in support of the global energy infrastructure.

“The health and safety of all H&P stakeholders -- our employees, customers and vendors -- remain a top priority at the company.” H&P staff have been working remotely where possible since March 13.