March 9, 2020 / 11:03 AM / 25 days ago

UPDATE 2-Diamondback cuts drilling activity as oil prices tumble

(Adds background, industry outlook, analyst comment, updates shares)

By Shanti S Nair

March 9 (Reuters) - Diamondback Energy Inc said it would immediately cut its drilling activity and operate fewer rigs in response to a months long free-fall in oil prices and after the commodity on Monday traded at its lowest in over four years.

U.S. oil prices lost as much as a third of their value on Monday in the biggest daily rout since the 1991 Gulf War, after Saudi Arabia signaled plans to raise output in a market awash with crude, as demand took a hit due to the coronavirus outbreak.

Diamondback's shares, which have nearly halved in value so far this year, fell about 40% in premarket trading amid a broader fall in oil and gas related stocks.

The company said it expects to drop two rigs in April and a third later in the second quarter. It will also cut completion crews to six from nine.

"As a result of current and expected oil price weakness, we have immediately reduced development activity and expect lower activity levels to continue until we see clear signs of commodity price recovery," Chief Executive Officer Travis Stice said in a statement.

Oil demand has been hit by the coronavirus outbreak with original forecasts for 2020 crude demand growth being slashed as factory operations, travel and other economic activities around the world take a hit from the virus spreading.

Diamondback said the reduced drilling activity will lead to lower oil production this year than its original forecast of 205,000 barrels of oil per day (bopd) to 215,000 bopd. Capital spending is also expected to fall.

In a bid to reassure investors, the company vowed to protect its free cash flow and dividend, despite the anticipated hit to results.

"Diamondback has never been about growth for growth's sake... Because the expected returns of our 2020 program have decreased, we have decided to wait for higher commodity prices to return to growth," Stice said.

Diamondback's reaction, along with the possibility of personnel reductions, is necessary in the current crude price environment, said SunTrust Robinson Humphrey analyst Neal Dingmann.

Analysts expect other oil and gas producers to follow suit.

Oilfield services provider KLX Energy Services Holdings Inc also said on Monday it expects the coronavirus to force producers to cut spending and investment in the coming months.

Diamondback's smaller peer Riviera Resources Inc said it was delaying plans to start drilling in the Ruston Field of North Louisiana.

Reporting by Shanti S Nair and Shariq Khan in Bengaluru; Editing by Shinjini Ganguli

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