B8 Business The Boston Globe WEDNESDAY, MARCH 11, 2020
By Carlos Caminada
BLOOMBERG NEWS
CALGARY — For more than
two years, the United States has
been the world’s No. 1 oil pro-
ducer, a status often hailed
proudly by President Trump.
Now, the crown is at risk.
The standing of the United
States has largely been based on
a concession from Saudi Ara-
bia, which orchestrated output
curbs in tandem with Russia
that helped prop up prices. But
with the Saudis now threaten-
ing to flood the world with oil
after its production pact fell
apart, prices are in free-fall,
having dropped by half in two
months to around $30 a barrel.
The result: Most shale wells
are now unprofitable and drill-
ers are scrambling to scale back
operations. At $35 a barrel, US
output — now about 13 million
barrels a day — could fall by 1
million barrels this year, ac-
cording to BloombergNEF, and
by 2.5 million in 2021, said
Scott Sheffield, who heads one
of the biggest independent
shale producers. Meanwhile,
the Saudis have vowed to sup-
ply 12.3 million barrels daily.
“It’s all about getting by,”
Sheffield, the chief executive of-
ficer at Pioneer Natural Re-
sources Co., said in an interview
Tuesday on Bloomberg TV. He
sees most companies “going in-
to maintenance mode” until
prices rise, adding, “nobody
wants to increase the balance
sheet in this environment.”
Sheffield’s not alone in his
estimate. Rystad Energy, an Os-lo-based industry consultant,
sees a 2-million barrel drop
next year if prices remain below
$35, while BloombergNEF pre-
dicts a 1.5 million drop by the
end of 2021 for the four top
shale fields. Meanwhile, Gold-
man Sachs Group Inc. on Sun-
day said it sees Brent, the global
benchmark, sitting at $
through the third quarter.
Shale explorers reacted al-
most immediately to the price
crash.
Occidental Petroleum Corp.
on Tuesday cut its dividend for
the first time in at least 20
years, opting to conserve cash
to cover its debt. Parsley Energy
Inc. and Diamondback Energy
Inc. both said they would cur-
tail drilling and fracking for the
rest of this year. Overall, the in-dustry could cut the number of
frack crews in US shale fields by
half this year to 140, according
to an estimate by Coras Oilfield
Research.
That large a drop in activity
could quickly threaten Ameri-
ca’s nascent status as a net pe-
troleum exporter, achieved only
in the last few months. Last
week, the United States was a
net exporter of 1.52 million bar-
rels a day of crude and refined
products.
Still, the US shale industry
has shown extraordinary resil-
ience in the past.
In early 2016, the industry
was in tatters when crude
plunged to about $30 a barrel.
That’s when the Saudis stepped
in, building a coalition that tied
OPEC to Russia and other coun-tries in a move that limited
global production, boosting
prices. Meanwhile, shale pro-
ducers became increasingly
more efficient at shaking loose
the oil hidden in the ground.
Production could continue
to rise in the short term this
year before it starts to fall, ac-
cording to Rystad. Moving for-
ward, though, with the Saudis
and Russia feuding, the US in-
dustry is caught in the middle
with a lot less room to maneu-
ver.
The sector has found itself
on a treadmill of sorts, with
fracked wells experiencing
steep declines over time com-
pared with conventional wells.
That’s compelling shale produc-
ers to keep drilling simply to
maintain output levels and cashgeneration.
At the same time, shale ex-
plorers were already falling out
of favor before the price crash,
with investors demanding they
focus on delivering free cash
flow and returns, rather than
burn borrowed cash to grow.
The S&P index of oil and gas ex-
plorers, which declined more
than 40 percent over the last
three years, has plunged 62 per-
cent so far in 2020. In the bond
market, the rout triggered by
the global virus outbreak was
already pushing the debt of
many explores to distressed lev-
els. The median yield on bonds
of drillers with a market value
below $500 million was at
about 30 percent last week, ac-
cording to data compiled by
Bloomberg.are starting to feel the pain.
One clothing shop on Newbury
Street, for example, went
several days without a single
transaction.
Hurst said he might ask
lawmakers to move up the
state’s sales tax holiday, from
August to sometime this
spring, to give merchants a
boost. Shares in two local
publicly traded chains, J.Jill
and Destination XL, have been
hammered in recent days,
much worse than the broader
market decline; Quincy-based
J.Jill even warned it’s at risk of
being delisted from the New
York Stock Exchange.
Not everyone is doing
poorly. (Been to a Costco
lately?) Delivery businesses –
from Amazon to Instacart – are
thriving, though many report
demand-induced delays.
Shares in Westborough-based
BJ’s Wholesale Club rose 14
percent in the past week. Yes,
Purell and Lysol are flying off
the shelves. But so are toilet
paper, pasta, Campbell’s soupuCHESTO
Continued from Page B— even oat milk.
Real estate:Buyers must
like the super-low interest
rates. The economic
uncertainty? Not so much,
especially as we head into the
big spring season.
Kurt Thompson, president
of the Massachusetts
Association of Realtors, said
he’s not seeing sluggishness
yet. But the National
Association of Realtors’ top
economist expects sales
volume to drop by 10 percent.
Virtual open houses could be
next. One bright side: The low
rates are fueling a refinancing
boom.
Legal:Phones are ringing
off the hook at law firms. One
employment attorney at
Goulston & Storrs said
everyone he has ever
represented seems to be calling
with questions. What should
employers do if schools shut
down, or public
transportation? When should
the work-from-home decision
be made? How do stores deal
with sick customers? What
kind of virus risks need to bedisclosed to investors? A
common thread: Clients are
polishing off contingency
plans, and putting them to the
test.
Manufacturing:Factories
are particularly vulnerable;
many are adjusting their
outlooks downward for 2020.
Most plant employees can’t
work remotely. Plus, Asia is
often a crucial link in the
supply chain. Hasbro warned
that some toy shipments – yes,
even baby Yoda — could be
delayed.GeneralElectric,in
particular, has suffered, with
shares plunging nearly 20
percent in the past week as
investors apparently realized
the fallout wouldn’t be limited
to GE’s substantial Chinese
operations.
Software:Software firms
are already well adapted to go
into WFH mode, as working
remote is part of the deal for
many. Greater Boston is a
hotbed of business-to-business
software providers. The ones
that help employees work from
home could get a boost.
LogMeIn, for example, hasseen spikes in demand for its
GoToMeeting and
GoToWebinar products; the
Boston company is offering
free access for health care
providers, schools, and other
nonprofits for three months.
Life sciences:Biotech
companies and medical device
manufacturers are seeing
disruptions, just like the rest of
us. But many also see a
business opportunity.
Marlborough-based Hologic
just received federal funding
for its coronavirus test.
Moderna Therapeutics in
Cambridge begins human
trials this month for its
vaccine. A team at Beth Israel
Deaconess is working on two
as well. And Japanese
drugmaker Takeda, whose US
headquarters are in
Cambridge, is focused on a
treatment. It’s too bad for them
— and the rest of us — that
vaccines and cures can’t be
developed overnight.Jon Chesto can be reached at
[email protected]. Follow
him on Twitter @jonchesto.On Wall Street, the anticipa-
tion of Washington pumping
money into the economy
helped stocks recover some of
their big losses on Monday. In a
volatile up-down-up session,
the Dow Jones and Standard &
Poor’s 500 indexes each gained
4.9 percent, after plunging
more than 7 percent on Mon-
day. US crude oil prices rose 11
percent, chipping away at the
25 percent beating they took
the day before.
Trump hasn’t publicly dis-
cussed details of his stimulus
package. Kudlow called it a
“bold plan,” noting that the
president would like to see pay-
roll taxes eventually disappear
for good. That seems unlikely,
given it would cut something
like $1 trillion in government
revenue.
Senate majority leader
Mitch McConnell didn’t en-
dorse Trump’s proposals and
said any payroll tax cut would
require the support of Republi-
cans and Democrats in both
chambers. Trump could enactuPAYROLL
Continued from Page Bother measures through execu-
tive action.
“We’re hoping that he and
the speaker can pull this to-
gether,” the Kentucky Republi-
can said, referring to Mnuchin
and Pelosi.
Meanwhile, Trump once
again pressured the Federal
Reserve to cut interest rates to
support the economy, even
though central bankers an-
nounced an emergency reduc-
tion of one-half of a percentage
point last week. The Fed is
scheduled to meet next week.
“Our pathetic, slow moving
Federal Reserve, headed by Jay
Powell, who raised rates too
fast and lowered too late,
should get our Fed Rate down
to the levels of our competitor
nations,” Trump said on Twit-
ter.
Payroll taxes refer to the
portion of the paycheck that
funds Social Security and
Medicare; workers pay 7.
percent of their salaries for
these two programs, and em-
ployers match the contribu-
tions. The Social Security tax is
6.2 percent on annual incomeof up to $137,700.
The Medicare levy is 1.
percent, with no income cap,
though wages above $200,
are taxed at an extra 0.9 per-
cent.
For a worker making
$60,000 a year, temporarily
suspending payroll taxes would
result in a savings of about $
a week.
It’s unclear if the White
House also plans to include in-
come-tax withholding as part
of its relief package, which is a
more substantial paycheck de-
duction. Also not clear is
whether the millions of people
who are self-employed, such as
independent contractors,
would get relief.
Any suspension of payroll
taxes would be hugely costly to
the US government. Each per-
centage point reduction could
cost $55 billion to $75 billion
per year, according to the Com-
mittee for a Responsible Feder-
al Budget.
The White House is dusting
off a playbook used by the
George W. Bush administra-
tion and Congress followingthe financial crisis in 2008. The
idea is to put more money in
consumers’ pockets so they will
spend and bolster the econo-
my.
During the financial crisis
that began in 2008, most filers
received a $600 credit —
$1,200 for joint filers — minus
child and earned income cred-
its, according to the Tax Policy
Center. People who qualified
for the credit also could receive
an extra $300 credit for each
child eligible for the regular
child credit, the center said.
Senator Ed Markey said a
payroll tax cut would be misdi-
rected.
“A tax cut will do nothing to
address the Trump administra-
tion’s failure to adequately re-
spond to the coronavirus epi-
demic,” the Massachusetts
Democrat said in a statement.Material from Globe wire
services was used in this
report. Larry Edelman
can be reached at
[email protected].
Follow him on Twitter
@GlobeNewsEd.By Richard Clough
BLOOMBERG NEWS
US airlines outlined deep
cuts to their flight schedules as
the coronavirus provokes an
industry crisis that’s shaping
up to be worse than the after-
math of the 9/11 terrorist at-
tacks.
Delta Air Lines Inc. and
American Airlines Group Inc.
withdrew their profit forecasts
and said they would reduce do-
mestic and international fly-
ing. United Airlines Holdings
Inc. said it was running stress
tests for a potentially “dire sce-
nario” in which revenue would
plunge as much as 70 percent
in April and May. That com-
pares with a decline of about
40 percent in the two months
after 9/11.
“We’re not planning for
hope,” United President Scott
Kirby said at a JPMorgan
Chase & Co. conference that
was held virtually. “We’re plan-
ning for extreme scenarios.”
The severity of the sudden
slump prompted President
Trump to pledge help Tuesday,
as the virus’s spread upends
economies and prompts travel-
ers to stay home. An airline
trade group said last week that
the industry will lose as much
as $113 billion in sales because
of the virus, while Jefferies an-
ticipates the biggest annual
drop in commercial air traffic
since at least the 1970s.
While Trump didn’t men-
tion the details of any assis-
tance, his promise of aid was
enough to spur an airline rally
after two weeks of deep de-
clines. American led the gains,
surging more than 15 percent
after jumping as much as 20
percent for a record intraday
gain. United advanced 12.
percent.
While investors bet on a
measure of government relief,
the airlines are bracing for a
sharp drop in demand. At
United, new US bookings are
down 25 percent based on
trends in recent days, Kirby
said. Factor in cancellations,
and net domestic bookings fell
70 percent. Net bookings in
the company’s European and
Asian markets are even worse.
Kirby was careful to empha-
size that the revenue declines
United is preparing for in the
coming months don’t amount
to company forecasts. The ac-
tual performance probably
won’t be as bad, he said. Still,
United is ready to cut its sched-
ule again after last month out-
lining reductions in flying in
April.
Delta plans to cut domestic
capacity as much as 15 percent
and international flights by 25
percent, according to a compa-
ny statement Tuesday. Ameri-
can said it would reduce US
service 7.5 percent in April and
cut foreign flights by 10 per-
cent for the peak summer sea-
son.
In addition to flight reduc-
tions, Delta said it will freeze
hiring and suspend share buy-
backs. The Atlanta-based carri-
er’s cutbacks will help it save
$1.8 billion in costs compared
with its previous plan, chief ex-
ecutive Ed Bastian said at the
JPMorgan conference.
As a show of good faith dur-
ing tough times, some airline
executives have said they
would give back some of their
compensation. At United, Kir-
by and CEO Oscar Munoz will
give up their base salaries
through at least June 30, the
carrier said.Trump,Democratsdueloveraidingeconomy
Impacts will ripple across many sectors
LUKE SHARRETT/BLOOMBERG/ FILE 2019
General Electric’s aviation assembly plant in Indiana. GE shares have plunged nearly 20 percent in the past week.AsSaudisrampupoiloutput,USproducersscaleback
Airlinesbracefor
virus-fueledcrisis