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Unocal Facing Weak Prices, Cutting Spending
Unocal Corp., like most other producers struggling againstdepressed oil and gas prices, said Wednesday it expects to cutcapital spending by 30 to 40% in 1999 from this year’s level. Inaddition, the company is targeting cash expense reductions of $150million, of which about $100 million has already been identified.
“Our challenge in the near-term is to deliver earnings, maintainproduction and keep a manageable level of debt while funding keygrowth projects in a world of depressed commodity prices,” saidRoger C. Beach, CEO. “Our portfolio of growth opportunities is thebest it’s been in many years, and we will not cut costs at theexpense of our long-term growth machine.”
The company expects 1999 capital spending to be in balance withanticipated cash flow based on continued low commodity prices. “Weexpect to spend somewhere between $1 billion and $1.2 billion,compared with an estimated $1.65 billion for 1998.” Capitalspending cuts will come from deferring spending on lower-returnprojects and suspending activities in non-core areas. The level ofspending in 1998 for some projects, such as the Gulf of Mexico OCSlease sales that established Spirit Energy’s major deep-water landposition, will not be matched in 1999.
“We are targeting cash expense reductions for next year throughelimination of certain project development costs, lower geologicaland geophysical expenses, substantial savings on production andoperating expenses and reduced administrative and general expense,”Beach said.
Beach pointed out that down cycles can create opportunities aswell as challenges. “With our strong balance sheet, we’re in aposition to capture some of these opportunities.” He said thecompany is looking to acquire low-priced assets, but only if theyenhance Unocal’s existing portfolio and add value immediately. Thelow rig-rate environment also presents opportunities to advance thecompany’s drilling schedule for key prospects. For example,Unocal’s Spirit Energy 76 unit has contracted for a deep-water rigthat was relinquished by a competitor, enabling Spirit toaccelerate its deep-water drilling schedule by nearly a full year.
At the same time, Unocal is transferring its proven deep-waterdrilling technology from Indonesia to Houston with the goal ofdrilling Spirit Energy’s deep-water Gulf of Mexico wells for up to50% less than the industry’s current average cost.
Despite the lower growth profile for 1999, Unocal’s worldwideproduction is expected to grow at a compound annual rate of 11.5%over the next five years, the same rate as announced in July.
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