E&Ps have crushed 2016 capex like an empty can. Guidance on spending cutbacks flooded in as the first quarter ended. Cowen & Co. tallied a 53% year-over-year drop in 2016 Lower 48 drilling and completion dollars for 32 independents as of late February. Adding in the majors, D&C capex contracted by 39% compared with 2015.

Bernstein Research’s summation revealed some of the most severe reductions: about 80% by Devon Energy Corp., Whiting Petroleum Corp. and Southwestern Energy Corp. versus their 2015 budgets. Close behind were Gulfport Resources Corp., Continental Resources Corp., RSP Permian Inc., Murphy Oil Corp., Apache Corp., Cabot Oil & Gas Corp., Diamondback Energy Inc. and Denbury Resources Inc., all of which sliced expenditures by about 65% or more.

Commodity-wise, Tudor, Pickering, Holt & Co. said oily companies would spend about 35% less and gassy producers about 47% less this year compared with 2015. By the firm’s calculations, integrateds guided to 21%, Canadian E&Ps to 37% and U.S. E&Ps to some 50% lower budgets.

The 50%-plus slash by E&Ps represents, on a two-year basis, a 70% step backward from 2014 spending, Bernstein Research analysts said. “Management teams are thus [finally] capitulating to the reality of $30/bbl and preparing capital budgets that will roughly balance cash flow from operations at these commodity price levels.”

The industry is drawing closer to its goal of bringing supply and demand into balance. This year’s capex plans “are consistent with today’s [YTD 2016 average] rig count of 600 and a current count [on Feb. 29] of about 500,” Bernstein analysts said. “Thus, we don’t necessarily have to see further rig count decreases to remain optimistic around capital spend.” The production response of mid-year 2016 is already “baked in,” they added.

Cowen & Co. analysts think the U.S. rig count will hit bottom soon. “Out of the 32 E&Ps that have announced D&C capex for 2016, 19 have provided rig count guidance implying 51 rigs will be dropped,” they said in a report.

“Using those 19 companies’ share of D&C spending, and assuming reductions from the IOCs are less severe, we estimate a total of 100 to 125 additional reductions to the U.S. onshore rig count, resulting in a bottom between 375 and 400”—a floor that could be reached this month.

Et voila—the production response. Topeka Capital Markets analysts, with a nod to EIA projections, think there’s light at the end of the drillpipe. “As witnessed in the rig data, we believe E&P companies are beginning to show signs of capitulation in dropping rigs across the board. This D&C slowdown will show up in the production data later this year with the EIA projecting another 600 Mbbl/d [approximately] to come off in domestic production, a figure we believe will likely turn out to be low given 2016 production guidance provided by managements,” they said.

“Accordingly, we think 2017 is set up nicely from a macro perspective, since it will be more difficult for the industry to re-accelerate, especially when considering the industry’s financial stress and the working down of DUC [drilled, uncompleted] inventory.”

Even if oil prices rise sooner—in first-half 2016—rather than later, two factors will deter E&Ps from once more outspending cash flow, according to Bernstein Research. “First, hedging limits cash flow and thus capex in a rising price environment (because it limits cash flow downside in a falling price environment); and two, deleveraging limits capex as excess cash flow is used to improve the balance sheet (buying back debt or paying down revolvers).”

General fear of putting the downturn on repeat and higher hurdle rates to a drilling restart will also help keep E&Ps in a conservative frame of mind, the analysts said.

It’s a slippery slope, though. Bernstein’s model of U.S. production suggests that if oil stays at $30, production will decline by nearly 2 MMbbl/d by 2017. “At $50 the U.S. supply picture is roughly flat (with a U-shape),” the analysts said. But at $70, the production decline would be interrupted, and supply would grow at about 1 MMbbl/d.

“The current price lull thus allows the U.S. to reverse the roughly 1 MMbbl of current oversupply by the back half of this year,” the analysts said. By their reckoning, if demand growth roughly offsets OPEC growth, the market could return to balance by year-end.

That’s better than kicking the can down the road.

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