Unocal to cut 1999 capital, cash expenses to counter continued low commodity prices
El Segundo, Calif., Nov. 11, 1998 - Unocal Corporation today said it expects to reduce capital expenditures by 30 to 40 percent in 1999 from the expected current year level. In addition, the company is targeting cash expense reductions of $150 million, of which about $100 million has already been identified.
"Our challenge in the near-term is to deliver earnings, maintain production and keep a manageable level of debt while funding key growth projects in a world of depressed commodity prices," said Roger C. Beach, Unocal chairman and chief executive officer. "Our portfolio of growth opportunities is the best it's been in many years, and we will not cut costs at the expense of our long-term growth machine."
Beach said the company expects its 1999 capital expenditures to be in balance with anticipated cash flow based on continued low commodity prices. "We expect to spend somewhere between $1 billion and $1.2 billion, compared with an estimated $1.65 billion for 1998," he said.
The capital spending reduction will come from deferring company-wide expenditures on lower-return projects and suspending activities in non-core areas. The level of spending in 1998 for some projects, such as the Gulf of Mexico OCS lease sales that established Spirit Energy's major deepwater land position, will not be matched in 1999.
"We are targeting cash expense reductions for next year through elimination of certain project development costs, lower geological and geophysical expenses, substantial savings on production and operating expenses and reduced administrative and general expense," Beach said.
He noted that the company will continue to focus on key high-value growth areas - Indonesia, Thailand, Gulf of Mexico, South and Southeast Asia, and the Southern Cone of Latin America - that are geologically focused and allow Unocal to leverage its drilling expertise and ability to operate at low cost.
Unocal also plans to withdraw from or suspend various projects in areas with either lower returns, heightened political risk, or unacceptable payout timelines.
Down Cycle Opportunities
Beach pointed out that down cycles can create opportunities as well as challenges. "With our strong balance sheet, we're in a position to capture some of these opportunities," he said.
He said the company is looking to acquire low-priced assets, but only if they enhance Unocal's existing portfolio and add value immediately. The low rig-rate environment also presents opportunities to advance the company's drilling schedule for key prospects.
For example, Unocal's Spirit Energy 76 unit has contracted for a deepwater rig that was relinquished by a competitor, enabling Spirit to accelerate its deepwater drilling schedule by nearly a full year.
At the same time, Unocal is transferring its proven deepwater drilling technology from Indonesia to Houston with the goal of drilling Spirit Energy's deepwater Gulf of Mexico wells for up to 50 percent less than the industry's current average cost.
For 1999, the company expects its net worldwide oil and gas production to increase by three percent to about 500,000 barrels of oil equivalent per day (BOED), compared with an estimated 485,000 BOED in 1998. The increased production will come mainly from new projects in Bangladesh and Myanmar.
The current 1999 production forecast has been lowered from previous estimates because of the company's plan to tie capital spending to anticipated cash flow as a guard against increasing debt. The revised forecast is dependent on market conditions in Asia, particularly Thailand, during the year.
Despite the lower growth profile for 1999, Unocal's worldwide production is expected to grow at a compound annual growth rate of 11.5 percent over the next five years, the same rate as announced the company's analyst conference in July 1998.
Forward-looking statements and estimates regarding capital expenditures, business expenses, and production and operating results in this news release are based on assumptions concerning market, competitive, regulatory, environmental, operational and other considerations. Actual results could differ materially.
Updated: November 1998