Just as the U.S. shale patch is drafting spending budgets for 2019, oil prices have tumbled 25 percent from four-year highs in early October to just above $50 a barrel WTI Crude at the end of November.

Oil at $50 is largely considered the break-even point for many shale developments and is the minimum price at which most U.S. drillers have been budgeting spending plans over the past year or so.

Most producers across the shale patch will be announcing 2019 spending plans alongside full-year 2018 earnings releases at end-January and early February, but signs have already started to emerge that the U.S. shale patch will be cutting budgets for 2019.

Collective spending plans for next year may be the first budgets cut across the industry since the oil price crash of 2015-2016, according to data compiled by Bloomberg Intelligence.

Just two months ago, $50 oil was not the base-case scenario at which U.S. companies planned, and few had expected such a steep price correction. Now exploration and production companies—who had just started to report rising cash flows and to finally reward shareholders with buybacks and increased dividends—find themselves in a position to choose from where to cut spending next year, considering that a prolonged period of $50 oil would eat into cash flows and undermine previous cash generation projections.

Anadarko Petroleum is one of the few companies that have already announced its 2019 budget—and it’s lower than this year’s. Anadarko said in mid-November that its 2019 capital investment program is in the US$4.3 billion-US$4.7 billion range, plus a US$1 billion addition to its share buyback program. The company expects around US$1.6 billion adjusted free cash flow at $60 WTI in 2019. So lower WTI prices would undermine this free cash flow estimate.

Analysts who until recently expected an uptick in the U.S. shale patch budgets, now see declines. Energy consultancy Wood Mackenzie, for example, expected minor increases in 2019 budgets, but now sees budgets either flat or down next year compared to this year, Andy McConn, a Houston-based analyst at WoodMac, told Bloomberg.

Related: How Much Does OPEC Need To Cut To Balance The Market?

The current sentiment and expectations about 2019 budgets are in stark contrast with the mood in the companies’ Q3 earnings releases and budget tweaks.

According to a Rystad Energy analysis of 34 onshore producers, their combined capex guidance increased by an additional US$1.4 billion in the third quarter of 2018, after a US$3.7-billion increase in Q2, with companies active in the Permian accounting for over 70 percent of the total budgets adjustment.

In the Dallas Fed Energy Survey for Q3—carried out in September when the oil market was still fearing a huge loss of Iranian oil supply—executives at 166 energy firms forecast on average that WTI prices would be $68.81 per barrel by the end of this year, with responses ranging from $55 to $85 per barrel. Only around 6 percent of respondents expected WTI to be lower than $65 a barrel at end-2018.

Two and a half months after the survey, the mood on the market is starkly different and the WTI price is lower than the lowest year-end projections of the company executives. Drillers have started to plan reduction in budgets, according to executives and officials who spoke to Reuters last week.

Smaller producers in Texas have already begun to scale back some drilling activity, according to Texas Railroad Commissioner Ryan Sitton.

“Six weeks ago some of these were profitable and now they’re break-even,” Sitton told Reuters.

Related: The Biggest Losers Of The Current Oil Price Slump

“The (price) swing has been large enough that we have some companies that are no longer generating free cash flow.”

The next few days may show if WTI prices in the low $50s will persist, as the OPEC/non-OPEC meeting in Vienna will be discussing a production cut to prevent a new global glut and prop up prices.

If the cartel and allies fail to lift the market out of the bearish mood or if they decide to avoid angering U.S. President Donald Trump—who wants oil prices even lower— by not acting decisively on cuts, the U.S. shale patch may be in for some complicated math of how to balance production growth and shareholder returns at $50 WTI oil.

By Tsvetana Paraskova for Oilprice.com

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