ConocoPhillips cuts spending to half of 2014 level

ConocoPhillips, one of the largest oil and gas producers in the US, has announced another sharp cut to its capital spending as it seeks to protect its dividend, pointing to weaker output in the future.

The group has set a capital budget for 2016 of $7.7bn, down 25 per cent from this year and less than half the amount it spent in 2014.

Its move is the latest sign of how weak oil and gas prices are forcing companies to cut investment, reducing future crude supplies and contributing to bringing the oversupplied market back into balance.

Conoco’s move echoes the announcement from Chevron, the second-largest US oil group by market capitalisation, which said on Wednesday that it would cut capital spending by 24 per cent next year.

Conoco said on Thursday that it expected oil and gas production growth of 1-3 per cent next year and did not give any projections for output beyond that, saying it would depend on what happened to prices.

In the spring of 2014, before oil and gas prices slumped, it was projecting production growth of 3-5 per cent per year.

Ryan Lance, chief executive, told analysts on a call: “Despite the tough market, our dividend remains the highest priority use of our cash.”

He added: “We view the dividend level as a long-term decision and we’ve been in the current low price cycle for a relatively short period of time.”

Mr Lance said that the company had the flexibility to ramp up spending again should prices improve, although it would be “disciplined” in increasing investment in the event of an upturn, and would also strengthen its balance sheet.

The US operations outside Alaska, which include shale oil and gas, will take some of the biggest reductions in capital spending, Conoco said.

In part that reflects falling costs — rates for onshore rigs used to drill shale wells have fallen by 32 per cent, for example — but Conoco has also been scaling back its activity.

It is planning to run 13 rigs in the US outside Alaska next year, the same as it has at the moment, but less than half the 32 rigs it was using at the end of 2014.

Output from its shale oil and gas operations in the US is expected to show “modest” decline in the medium term, the company said.

Chevron also this week announced capital spending cuts, after John Watson, its chief executive, said that dividend payments were its “top priority”.

That approach contrasts with other energy companies, including Kinder Morgan, the largest pipelines operator in North America, and Eni, the Italian oil and gas group, which have cut their dividends this year.

There has been speculation that Royal Dutch Shell and BP, the largest European oil companies, might also be forced into cuts, although both have insisted that they will maintain their payouts.