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Why the Oil Search share price crashed 9% to a decade-low today

One of the worst performers on the S&P/ASX 200 Index (ASX: XJO) on Wednesday morning has been the Oil Search Limited (ASX: OSH) share price.

The energy producer’s shares have fallen over 9% to a decade-low of $2.40.

Why is the Oil Search share price crashing lower?

Investors have been selling Oil Search’s shares for a couple of reasons.

The first is another heavy decline by oil prices overnight. Concerns over a price war between Saudi Arabia and Russia is weighing heavily on prices and the shares of energy producers.

It isn’t just Oil Search that is sinking lower. Both Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) shares are tumbling notably lower today as well.

In addition to this, this morning Oil Search released an update on its capital expenditure and balance sheet.

What did Oil Search announce?

In light of the recent material decline in oil prices and global circumstances, management has undertaken a comprehensive review of its planned activities in 2020.

According to the release, the objective of the review has been to minimise forward expenditure and maximise liquidity, while protecting its base value and preserving the option to deliver its growth projects when market conditions improve.

Oil Search has revealed that other than work programmes required to ensure ongoing reliable and safe operations, all discretionary activities within its control that have not yet commenced are being suspended or deferred. And where possible, some of its projects that have commenced have also been suspended safely.

This is expected to result in a material reduction in investment expenditure in 2020. Instead of its previous guidance of US$710 million to US$845 million, it now expects to spend US$440 million to US$530 million.

It’s a similar story for its capital expenditures. Its forecast capital expenditure from April has been reduced from US$400 to US$500 million, to between US$200 million and US$300 million.

Management commentary.

Oil Search’s Managing Director, Dr Keiran Wulff, explained: “The recent dramatic fall in oil prices to below US$40/bbl, due to the impact of COVID-19 on oil demand, combined with concerns about a material increase in oil production following the recent failed OPEC+ meeting on further production cuts, has led to a major drop in oil and gas company share prices. It is unclear how long these events and the consequent oil price and share market volatility will last.”

“While Oil Search is fortunate to have world class assets, these unprecedented times require us to take immediate and decisive steps to position us for a potentially extended period of lower oil prices and business uncertainty,” Dr Wulff added.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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