B12| Wednesday, March 11, 2020 THE WALL STREET JOURNAL.**
since the first Gulf War in 1991
on Monday. Some of these
losses were recouped Tuesday
as the Brent oil price gained 8%
amid a broader revival in mar-
kets.
Saudi Arabia’s aggressive
discounts are targeting some of
Russia’s core markets in China
and Northern Europe. The king-
dom is also taking aim at U.S.
oil producers, Saudi and OPEC
officials said.
The Russian energy minister
declined to comment and the
Saudi energy minister didn’t
respond to a request for com-
ment. A spokeswoman for the
Saudi investment ministry de-
nied that discussions had taken
place between Mr. Falih and
Mr. Novak.
Some oil officials say they
struggle to see the logic behind
Saudi Arabia’s decisions. Oth-
ers see the battle as tied to
Prince Mohammed’s recent ef-
forts to tighten his grip on
power and raise his interna-
tional clout, according to peo-
ple involved in the OPEC talks.
Russia’s failure to find com-
mon ground with Saudi Arabia
and OPEC on oil cuts was pre-
ceded by talks in early Febru-
ary between Riyadh and Mos-
cow that focused on the
possibility of forging a broader,
long-term alliance.
Under one scenario, Saudi
Arabia would have sped up its
investments inside sanctions-the crown prince overruled his
brother, who had agreed to a
three-month production cut
with OPEC, and extended the
proposed cuts through the end
of the year, these people said.
The crown prince ordered
the minister to force OPEC to
adopt the decision—even if
that meant risking any hope
that Russia would join in, they
said.
Now the kingdom is pursu-
ing a strategy of undercutting
its rivals by drowning markets
with cheaper oil—a move that
has a tendency to backfire, say
longtime market watchers.
On Saturday, the Saudi en-
ergy ministry told Aramco offi-
cials that instead of cutting
production, they should pump
more oil and lower the price.
Saudi Arabia soon spread the
word throughout the market.
“It was the Saudi declaration of
war against Putin,” said a se-
nior Saudi official.
Within hours, officials at the
finance ministry were tasked
with preparing a budget sce-
nario that envisions benchmark
Brent crude prices dropping
into a $12-$20 a barrel range.
All Saudi ministries were also
asked to cut their spending sig-
nificantly to prepare for this
scenario.
But the strategy has back-
fired before.
In 2014, then-Saudi oil min-
ister Ali al-Naimi persuadedOPEC to pump at will to com-
pete with U.S. shale producers.
His rationale was that the car-
tel’s members had the ability to
produce at extremely low costs.
But after the price of Brent
crude fell below $28 a barrel in
early 2016, the Saudi royal fam-
ily fired him. His successor, Mr.
Falih, negotiated a pact be-
tween OPEC and Russia to cut
production in the first OPEC+
deal. Within months, oil prices
more than doubled.
Russia is better prepared to
weather low oil prices than in
the past.
Oil now accounts for less
than a third of budget revenue.
The country has also accumu-
lated massive reserves. The
Russian finance ministry said
Monday that it could withstand
10 years of prices at $25 to $30
a barrel.
Still, some Russian produc-
ers say the oil-market war is
excessive. “I’m in shock. This is
a very unexpected, irrational
decision to put it mildly,” Leo-
nid Fedun, vice president of
Russian private producer Lukoil
told Russian newspaper the
Bell. Russian oil companies
would like to increase produc-
tion, he said, but that won’t
make up for losses from falling
prices.
—Rory Jones,
Donna Abdulaziz
and Georgi Kantchev
contributed to this article.Crown Prince Mohammad bin
Salman on Monday to discuss
global energy markets, the
White House said Tuesday
morning. The leaders also dis-
cussed “other critical regional
and bilateral issues,” according
to a statement.
Saudi Arabia and Russia’s
decisions to flood markets are
surprising, as China—the
world’s largest oil importer—
has been hobbled by the deadly
coronavirus, which has hurt its
demand for oil after refineries
and factories were forced to
shut.
Saudi Arabia’s struggle for
oil-market supremacy might
earn it a sliver of market share
at the expense of Russia and ri-
val U.S. shale producers, but
the cost of a price war might
be too much for the kingdom to
bear, analysts and oil officials
say.
The combination of declin-
ing global consumption and ris-
ing supply pushed Brent crude,
the benchmark for global
prices, to its sharpest decline
Continued from page B1
Battle Over
Output
Intensifies
Shares gained about 15% Tuesday following the announcement. A company facility in New Mexico.JUSTIN CLEMONS FOR THE WALL STREET JOURNALhit Russia and backed the
Kremlin’s military efforts in
Syria, according to people fa-
miliar with the matter.
Ultimately, the crown prince
didn’t commit to a deal, say the
people familiar with the matter,
because he didn’t want to
alienate the U.S. Weeks later,
roughly at the same time that
Russia was refusing to endorse
the Saudi-backed plan to cut oil
output, Mr. Putin was initiating
a rapprochement with Turkey,
a Saudi foe, the people said.
“It’s all about egos now, notabout the oil market,” said a
Saudi-government adviser.
Meanwhile, Prince Moham-
med saw the OPEC debate as a
way to assert his broad influ-
ence over the kingdom’s oil
policies and to prove to his
older brother, Saudi energy
minister Prince Abdulaziz bin
Salman, that he could force
Russia’s hand, according to
people familiar with his think-
ing.
In a terse phone call to
Prince Abdulaziz late Thursday,Moscow isn’t ruling
out further
cooperation with
OPEC.year by refinancing debt. But
the ability of others to follow
suit looks doubtful now that oil
prices have dropped to their
lowest level since shortly after
OPEC initiated the price war
with shale producers in 2014.
Though oil producers are
generally better prepared than
they were then for crude prices
in the $30s, the latest decline
will “stress-test the creditwor-
thiness of companies,” said Jef-
feries analyst Sean Darby. “The
impact on companies is less
about earnings and more about
solvency.”
Energy bonds, particularly
those sold by smaller compa-
nies, are trading at prices that
indicate investors have little
faith that they will be repaid.
Bonds sold by SM EnergyCo., which operates in Texas and
Colorado, traded at 41 cents on
the dollar Tuesday even though
the debt isn’t due until 2027.
Low oil prices pose risk to
banks, which have more than
$100 billion on loan to energy
producers through lines of
credit that are based on the
value of companies’ oil and gas
reserves. Those credit lines are
typically recalibrated twice a
year to reflect market prices for
the still-in-the-ground fossil fu-
els that serve as collateral.
These loans were last evalu-
ated in autumn, when crude
prices were north of $50 a bar-
rel. If prices remain in the $30s,
a lot of oil won’t be economical
to extract, meaning companies
can no longer borrow against it
and must promptly repay banks.record of 13.1 million barrels a
day during the week ended Feb.
28, according to the U.S. Energy
Information Administration.
Then Saudi Arabia, the de
facto leader of the Organiza-
tion of the Petroleum Export-
ing Countries, slashed prices
for its oil over the weekend. It
was an unforeseen flex, aimed
at taking market share from
Russia.
The main U.S. oil price, West
Texas Intermediate, fell 25% on
Monday while Brent crude, the
international benchmark, lost
24% in oil’s biggest daily decline
since 1991. Prices rebounded
some on Tuesday, yet West
Texas Intermediate, which
closed at $34.26 a barrel, is still
too low for many U.S. wells to
be economical.
The bounty of oil and gas un-
earthed by North American
shale drillers over the past de-
cade has brought down energy
costs for consumers and compa-
nies. Yet it has come at a cost.
Energy companies borrowed
hundreds of billions of dollars to
drill miles-long and multimil-
lion-dollar wells, lay pipelines
between customers and new
drilling regions and maintain
huge fleets of heavy machinery.
Investors snapped up their
bonds, which offered higher
yields than many other forms of
debt. Energy bonds became one
of the biggest segments of the
Bloomberg Barclays high-yield
index, tying a big chunk of the
junk-bond market to volatile
commodity prices. A string of
bankruptcies in the oil patch trig-
gered a junk-bond selloff in 2015.
North American oil-and-gas
companies have more than $200
billion of debt maturing over
the next four years, according to
Moody’s Investors Service.
Some companies were able to
push out due dates earlier thisThe oil-price collapse that
wiped out tens of billions of dol-
lars in energy-company stock
market value in a moment this
week calls into question the in-
dustry’s ability to pay a huge
tab that it rang up with bond-
holders and banks to fuel its
price war with OPEC.
Investors accelerated their
yearslong flight from energy-
company assets, sending stock
and bond prices down by dou-
ble-digit percentages to start
the week. The exodus of capital
threatens an industry that has
been a pillar of the debt markets
and of the U.S. economic recov-
ery since the last recession.
Stocks in the S&P 500 energy
sector fell 20% Monday in their
worst day on record in data go-
ing back to 1994. The SPDR S&P
Oil & Gas Exploration & Produc-
tion exchange-traded fund fell
more than a third to its lowest
point since the widely cited ba-
rometer was launched in 2006.
Bonds traded as if the compa-
nies that issued the debt were
already out of money.
Though many stock and bond
prices bounced back a bit on
Tuesday, the moves were muted
compared with the declines and
did little to alter the big picture.
The declines are putting the
U.S. oil industry in a precarious
position in the coming months,
with the fallout likely to ripple
through everything from agri-
cultural commodities to private-
equity funds and affect a range
of businesses, from manufactur-
ers to financial institutions.
Energy prices were already
tumbling this year owing to con-
cerns the coronavirus epidemic
would sap global demand for oil
and natural gas. Yet American
producers kept drilling. U.S.
crude-oil production hit a fresh
BYRYANDEZEMBER
Energy Sector Faces Reckoning on Debt
The drop in oil prices raises doubts about the ability of domestic drillers to repay big debt loads. Extraction in Texas’ Permian Basin.BENJAMIN LOWY/GETTY IMAGESWASHINGTON—With oil
prices down sharply, the Energy
Department postponed a sale
from the government’s Strategic
Petroleum Reserve that had
been scheduled for Tuesday—a
move that could provide some
relief for battered oil markets.
The Trump administration is
seeking to shore up financial
markets hit hard by fears over
the coronavirus and an oil glut.
Crude prices Monday had their
biggest one-day percentage
drop since 1991, triggered by a
price war between Saudi Arabia
and Russia as they struggle
over dwindling demand from an
economic slowdown in China.
James Lucier, a managing di-
rector at Capital Alpha Partners
LLC, said the action fits in with
the Trump administration’s
plan to shore up financial mar-
kets and the broader economy.
President Trump said his ad-
ministration would discuss with
Congress several measures to
ease economic pain, including a
possible payroll-tax cut and
help for hourly wage earners.
“They’re clearly signaling
they’re ready to go big,” Mr. Lu-
cier said.
Holding the sale as sched-
uled would have pumped an-
other 12 million barrels—nearly
equal to one day of U.S. crude
production—into markets that
are already oversupplied.
“Given current oil markets,
this is not the optimal time for
the sale,” the department said.
Congress had been trying to
raise money by selling off the
country’s strategic reserves. Re-
cent laws require the Energy
Department sell about 40% of
the reserve’s 700 million barrels
over a decade. The money from
this latest sale was intended to
fund maintenance and upgrades
of the reserve’s facilities.
The department didn’t
schedule a new sale date.
Oil prices are down nearly
40% since the department an-
nounced the sale dates less than
a month ago. Most of that col-
lapse happened in recent days
after Saudi Arabia aggressively
cut prices when the Organiza-
tion of the Petroleum Exporting
Countries and Russia-domi-
nated allies failed to strike a
deal to cut output.
Light, sweet crude for April
delivery closed up $3.23, or
10%, at $34.36 a barrel on the
New York Mercantile Exchange.BYTIMOTHYPUKOSale of Oil
From U.S.
Reserve
Postponed
gling to turn a profit even be-
fore the novel coronavirus
blunted global demand. Compa-
nies with high debt levels are
particularly vulnerable because
Wall Street, burned by years of
poor returns, isn’t inclined to
rescue them.
Shares in Occidental gained
about 15% Tuesday following
the announcement, as U.S.
benchmark oil prices rose
roughly 10%. The company’s
shares plunged roughly 53% on
Monday as oil prices fell 25% to
about $31 a barrel. That left itwith a market capitalization of
about $11 billion, down from
more than $46 billion at the
time of its offer for Anadarko,
according S&P Global Market
Intelligence.
Occidental topped Chevron
Corp. in a bidding war for Ana-
darko last year, winning prized
assets in the heart of the U.S.
oil boom: the Permian Basin of
West Texas. Occidental’s acqui-
sition of Anadarko, a company
nearly its own size, has come
under intense criticism for
loading up the company withdebt, with activist investor Carl
Icahn calling for changes to the
board following what he called
a “fundamentally misguided”
deal.
Occidental’s aggressive ef-
forts to win Anadarko included
lining up $10 billion in financial
backing from Warren Buffett’s
Berkshire Hathaway Inc., via
the sale of preferred stock—and
included a deal to sell Ana-
darko’s Africa assets for $8.8
billion to France’s Total SA.
As of year-end, Occidental’s
total debt of about $41 billionwas more than four times its
earnings, excluding interest,
taxes and other accounting
items, up from about one times
earnings a year earlier, S&P
Global Market Intelligence data
show.
Houston-based investment
bank Tudor, Pickering, Holt &
Co. suggested Monday that Oc-
cidental should cut its dividend,
which many large oil compa-
nies use to entice investors.
Following the oil market rout
Monday, Occidental would have
been unable to pay out its
planned $2.8 billion in dividend
payments and invest in main-
taining existing oil production
without taking on additional
debt, according to the bank.
“Collapse in crude only fur-
ther stresses the company’s
balance sheet,” the bank said in
a note to investors.
Occidental has increased its
dividend every year since 2002,
and Ms. Hollub has called the
policy a hallmark of the com-
pany. In February, she told in-
vestors the company planned to
continue the dividend despite
declining oil prices as the coro-
navirus took hold globally but
said it wouldn’t take on addi-
tional debt to pay it.Occidental Petroleum
Corp., laden with debt follow-
ing its $38 billion purchase of
rival Anadarko Petroleum Corp.
last year, is slashing spending
and dividends as it responds to
a crash in oil prices.
The Houston-based producer
plans to cut its quarterly divi-
dend to 11 cents a share effec-
tive in July, from 79 cents, the
company said Tuesday. It also
said it plans to slash spending
this year by roughly 32% to
about $3.6 billion.
“Due to the sharp decline in
global commodity prices, we
are taking actions that will
strengthen our balance sheet
and continue to reduce debt,”
Occidental Chief Executive
Vicki Hollub said. She added
that the company can break
even with U.S. benchmark oil
prices in the low $30s a barrel,
though that metric typically ex-
cludes several costs.
Occidental, one of the larg-
est U.S. shale producers, is an
acute example of the threat
that the collapse in oil prices
poses for the industry. Many of
these companies were strug-
BYREBECCAELLIOTT
ANDCHRISTOPHERM.MATTHEWS
Occidental to Slash Spending 32%, Cut Payout
NorthAmerican
oil-and-gasdebt
maturitiesSources: Moody's (debt); FactSet (ETF price)SharepriceoftheSPDR
S&POil&GasExploration
&ProductionETF
$800204060billion2018 ’19 ’20 ’21 ’22 ’23$203billionof debt
maturing over the
next four yearsWeekly$8002040602007 ’10 ’20BUSINESS & FINANCE