Hess cuts capex more as losses widen

US independent Hess cut an additional $300mn from its 2015 capital expenditure (capex) budget as the US independent posted losses for two quarters in a row amid the 50pc plunge in crude prices.

Among the first large independents to report first quarter income, Hess' numbers offer insight into the impact of sustained lower crude prices on US producers. Hess and others including Continental Resources and ConocoPhillips have made successive cuts to their capex to conserve cash. But fresh reductions suggest that those measures have not been adequate and more belt-tightening is likely.

Hess reduced its full-year capex guidance to $4.4bn from the $4.7bn it had set in January, which was 16pc lower than the $5.6bn spent in 2014. The 2014 capex was 10pc lower than a year earlier. Spending in the first quarter was $1.3bn versus $1.7bn spent in the fourth quarter.

The capex cut has also come about due to the decline, of anywhere between 10pc to 30pc, in rates service providers and suppliers charge for rigs, cement and chemicals. The lower end of the range is for products like steel, whose prices are still holding strong, and the higher end includes pumping services where declines have been strong. Overall, in the first quarter, drilling and completion costs dropped 9pc from a year earlier to an average of $6.8mn per well.

"In early February, we met approximately 100 of our top service providers and suppliers to seek meaningful and sustainable cost reductions," chief executive John Hess said on an earnings call, adding the company has identified cost reductions of about $500mn.

Despite the capex cut, the company's operations remained strong. Oil and gas output rose 14pc from a year earlier to 361,000 b/d of oil equivalent (boe/d). Assets that drove the growth include the Bakken shale in North Dakota, natural gas production from the Utica, as well as operations in Denmark, Malaysia and Thailand.

In the Bakken, the company lowered its rig count to 8 in April and plans to keep it that level for the rest of the year, from 12 in the first quarter and 17 as of the end of last year. Incorporating the cost savings, with an eight-rig program at current prices, the company aims to generate after-tax returns of 15pc or higher, Hess said.

"We have collapsed to our core and said things outside the core we will save for a later day," chief operating officer Greg Hill said.

During the quarter, the company hedged 50,000 bl of crude output for the remainder of the year at a Brent price floor of $60/bl and a ceiling of $80/bl. Including the impact of hedging, the company earned an average price worldwide of $44.78/bl for its crude, down 55pc from the $99.17/bl a year earlier. Natural gas liquids prices averaged $14.91/bl during the quarter, down 66pc from the $44.28/bl earned in the same period last year, while natural gas fell 33pc to $4.74/mcf.

The company reported a loss of $279mn in the first quarter versus income of $446mn a year earlier.

mg/dcb

Send comments to feedback@argusmedia.com

Request more information about Argus' energy and commodity news, data and analysis services.

Copyright © 2015 Argus Media Ltd - www.argusmedia.com - All rights reserved.