I can't say I haven't seen it coming.
Shares in my junior oil producer, Senex Energy Ltd (ASX: SXY), are already down 58% for the year, and roughly the same percentage since I bought them back at $0.60.
This morning management at Senex announced that they would be curbing capital expenditure by 20% in response to volatile oil markets.
In focussing on lower-risk, higher-reward exploration and development projects, the company will cut its number of wells drilled from 26 to 16.
Senex has also hedged some of its oil production at higher prices to protect its 3rd and 4th quarter sales revenue.
Furthermore, costs have been cut to the tune of $6 million per annum, which places Senex in about as good a position as it can be given the tough environment it now operates in.
Despite the cuts, there is no change to the full-year production target of 1.4 million barrels of oil equivalent. Senex currently has $74 million in cash, and is 'set to end FY15 (financial year 2015) in strong net cash position'.
Exactly how many million dollars is a 'strong net cash position' is not clarified.
As might be expected Senex isn't the only company cutting costs, with Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) revising their capital expenditure plans, and investors in Woodside set for a nasty shock with the dividend expected to drop as low as one quarter of its current 6.7% value.
It's not a good time to buy oil shares, particularly when there's more pain to come as future quarterly and half-yearly reports reveal just how bad an impact low prices have had on company earnings.
The potential for ratings downgrades on debt is also a real risk for a number of companies.
The only two bright spots at present are the fact that higher cost producers are being forced out of the market, and the chance that OPEC may reconsider its position when it meets again in March.
Be that as it may, making a big investment in companies that rely on external factors to make a profit is not the way to build a thriving portfolio.
Warren Buffett famously only targets 'price-making' companies, not 'price-takers' like commodity producers.
It's made him one of the richest men in the world, and his company, Berkshire Hathaway, has the most expensive shares in the world, costing $222,000 dollars a share.
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