How will companies survive $40 oil?

The oil price dropped below $40. It is now a big question whether oil companies, especially exploration& production (E&P) companies, will be able to survive at this price or not. Here are some proposed actions that oil companies can take.

1. Cost cutting


Companies should keep cutting costs. ConocoPhilips, the largest E&P company, has cut their capital spending to $5.5 billion. There are two types of cost cutting; one is permanent, and the other is cyclical. Permanent cost-cut involves how companies drill and frack wells. This kind of cost-cut is easy due to improvement in technology. Now it is possible to drill cheaper. It is possible to keep on cutting the permanent costs. The cyclical cuts are driven by the capacity of drilling rigs and fracking crews. This may not be possible once rig activity goes up.

2. Sell assets


Many companies are trying to fill the gap between cash flow and spending by selling assets. 75% of the E&P companies are taking this step.

3. Sell shares


Many companies like Marathon Oil, Newfield Exploration, Pioneer Natural Resources and others priced secondaries at the beginning of this year. Devon Energy priced a 69-million share secondary at $18.75, and it was snapped by the investors. Selling shares is a drastic step. Companies must try to cut costs and sell assets instead.

4. Mergers


It is the most drastic step to take. The small and mid-size companies like Concho Resources, Pioneer Natural Resources, Cimarex Energy and others might need to take this step. But big companies like Apache, Anadarko or EOG might be well off without merging with other companies.

We have to be optimistic that the price of oil will better soon. But we must also be prepared for the worse scenario. These steps can help the oil companies to survive during the low oil price period.