US producers face tough choices on growth, capital returns as oil falls below $60
A plunge in oil prices below $60 per barrel due to an escalating trade war may trigger anxiety across the U.S. oil patch, likely forcing companies to double down on measures including cuts to share buybacks and capital expenditures, analysts have said.
Brent crude and West Texas Intermediate (WTI) futures slid to their lowest since February 2021, as sweeping tariffs imposed by U.S. President Donald Trump sparked concerns of a recession amid signs of higher supply from top producers.
Raymond James analyst Pavel Molchanov said some producers might reduce 2025 capex if the downturn persists, though broader cuts will depend on the depth and duration of the slump.
"Share buyback is typically the 'flex variable' that can easily move up and down depending on how much free cash flow is being generated."
During the COVID-19 crash in 2020, when oil demand collapsed and prices briefly turned negative, Exxon Mobil slashed capital spending by 30%, while Chevron cut its budget by $4 billion and paused its buyback program.
ConocoPhillips had also trimmed spending and halted repurchases.
Although oil companies are now leaner and more disciplined, higher service costs and energy transition spending have narrowed financial buffers.
EXPECTING BREAKEVEN
While many operators benefit from low breakeven costs in the Permian Basin - which is expected to contribute nearly all of the U.S. Lower 48's production growth this year - paying high dividends can put financial pressure on companies working in costlier, less profitable oil fields.
Rystad Energy estimates many U.S. oil producers now face all-in breakeven prices above $62 a barrel, including dividends, debt service, and return targets.
"Some combination of near-term activity levels, investor payouts or inventory preservation will need to be sacrificed in order to defend margins," said Matthew Bernstein, vice president at Rystad.
The crude slump has cast fresh scrutiny on how U.S. oil and gas firms plan to maintain shareholder returns amid tighter margins.
RBC Capital Markets estimates Exxon's breakeven to cover both dividends and buybacks is $88 per barrel for 2025. Chevron's is even higher, at $95 per barrel.
"The corporate reality for public players means that already modest growth could be at risk if prices remain near $60 per barrel," Bernstein said.
Earnings reports later this month will offer insight into whether producers will stay the course or pivot toward cash preservation.
"We'll see where we are at the end of April and early May as to whether companies would cut capex or buybacks ... I'm sure we'll get cautionary language about the outlook if weakness were to persist," said Arjun Murti, a partner at energy consultancy Veriten.
(Reporting by Arunima Kumar in Bengaluru; Editing by Arpan Varghese and Anil D'Silva)
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