Fitch Ratings reported that North American exploration and production (E&P) companies continued to announce reductions to 2015 capital spending in Q4 earnings calls as a function of lower oil prices.

Capex cuts are ongoing as the price of West Texas Intermediate has dropped over 50% since July of last year and now stands at just over $50/barrel.

These announcements have highlighted noteworthy trends, including that cuts were smaller among larger E&P companies and that onshore shale operators bore the brunt of slashed capex budgets.

Unsurprisingly, the size of cuts has generally been inversely related to the size and credit quality of companies. The largest, best capitalized E&P companies with headroom to continue investing through the down cycle had the smallest budget cuts (Chevron, BP at just 13%), while high yield North American E&P companies with higher financial and operational leverage had the most severe cuts (Linn Energy at 53%; Laredo Petroleum at 60% and Halcon Resources at 74%).

Capex cuts have come disproportionately from onshore shale plays for several reasons. First, smaller, high yield E&P companies tend to be more significantly involved in shale than big integrateds. However, the flexibility associated with shale programs is more significant. Many companies in shale plays have operator status and hold acreage that is held by production, which allows them to control the pace of spending. Because shale well drilling is comprised of lots of smaller, cheaper wells with fast decline rates, it is easier to ramp spending up or down by adjusting rig count. By contrast, offshore projects tend to have longer lead times and more fixed commitments that make them generally harder and more costly to ramp down quickly.

One implication of this flexibility profile is that while shale is taking the brunt of the cuts so far, offshore drilling might see an increased share of the burden of reduced activity if oil prices remain at depressed levels into next year. As time passes and commitments roll off, companies will have increased flexibility to make unconstrained capex decisions across their entire portfolio. This is balanced by the fact that over the longer term, Fitch continues to believe that offshore projects will remain attractive to larger international oil companies as well as national oil companies as they attempt to offset declines in existing reserve bases with ‘needle-moving’ investments.