Most industry participants expect U.S. exploration spending and cash flow to decline this year, but few grasp the magnitude of the cuts actually to come, Raymond James & Associates Inc. analysts said.

Earnings season kicks off this week, with Schlumberger Ltd., the largest oilfield services operator in the world, delivering its results on Friday. Schlumberger’s forecast for the U.S. onshore may set the tone for how strong — or how weak — spending by the exploration and production (E&P) sector will be this year.

Surveys and bottoms-up data suggest domestic E&P capital expenditures (capex) will decline 25-35% from 2015 at strip prices. However, a top-down model by Raymond James suggests U.S. capex budgets — at current strip prices of $35 — likely would be double, at about 70% less than last year.

“We still view current oil prices as unsustainable since we think the global oil markets will still be massively undersupplied by late 2016, even if oil prices average $50 this year,” analyst Praveen Narra and colleagues wrote. “Looking further out, given our $75 oil deck in 2017, we believe a massive recovery will take place with a massive (and necessary) surge in U.S. cash flow and oilfield spending.”

The top-down capex model essentially treats the entire U.S. oil and gas industry as if it were only one company. The model is driven by key assumptions, including forecasted oil and natural gas production, commodity prices, hedging activity, basis differentials and oilfield service costs. Assumptions are weighed to public company data, but the model is used across the entire industry, including the private E&Ps.

Budgets this year likely will be based “on the strip plus the impact of hedges,” Narra said. “Hedging was a significant supporter of U.S. 2015 cash flows; however, with oil prices low for a full year, U.S. E&P companies are generally less protected this year.” Current oil strip prices are 30% lower than last year, but this year’s realized prices are expected to be 40% below 2015 pricing because of less hedging.

Overall production, meanwhile, is expected to decline by about 2% from 2015, led by a 5% drop in oil output. Partially offsetting lower realized prices will be even more E&P cost reductions.

“Specifically we are assuming a 15% annual reduction in cash operating expenses,” said Parra, which includes lifting costs, seismic, overhead and interest expenses” for both 2015 and 2016. The fixed cost reductions may seem aggressive, but industry cash flows could be down more than 70% year/year without them.

Raymond James is modeling an average $50/bbl for oil in 2016, with a strong second half recovery the most likely scenario. Cash flows are sensitive to commodity price changes, and a $5.00 movement in oil would equate to a 20% movement in cash flows, according to the analyst team.

“In other words, strip pricing would imply a nearly complete shutdown of the U.S. oil industry at current oil prices, hence our view that these very low prices are unsustainable for more than a few quarters (at best),” Parra said.

Analysts with Tudor, Pickering, Holt & Co. (TPH) said the “reality of low crude prices is sinking in for many operators. No one wants to be the first to report a 2016 budget as there is fear of the unknown on how plans will be taken by the market. That being said, equities are in freefall, debt yields continue to expand, and conversations with investors are focused on balancing cash flow to capex in order to ‘survive’ the downturn.”

Holding production flat still is being tossed around by some companies, “but when pressed on returns at strip pricing…there is little ability to defend activity beyond meeting held by production commitments or concerns that it will be harder to grow when the turn comes.”

The investors, said TPH’s team, “are struggling to look beyond February and most are now firmly in the camp that strip pricing is correct.” E&Ps that outspend to hold production levels “may ultimately underperform as 2016 guidance is given, especially if it is dependent on future asset sales or drawing down credit facilities.”

Oppenheimer & Co. also weighed in, noting that 4Q2015 results will reflect the plunge in prices.

“We expect 4Q2015 earnings to be sharply lower for all oil and gas producers, including integrated companies, with deeper losses and wider cash flow deficits, compared with the prior periods, as realized prices fell below breakeven levels,” analysts said. “The industry’s financial condition continues to deteriorate, despite asset sales and secondary offerings, which are a temporary solution to a longer term problem of low prices for a longer period.”