The Bank of International Settlements estimates that the average debt-to-assets ratio for smaller US oil and gas producers has almost doubled over the past eight years, while this metric has remained flat for large energy companies.
This heavy reliance on borrowing to fund drilling and development activities in US shale oil and gas plays will condition how these companies respond to lower oil prices, a development that threatens to reduce cash flows correspondingly.
To meet their payment obligations and comply with their loan covenants, many US oil and gas producers have sought to bolster their cash flow by growing their hydrocarbon output while aggressively reducing capital expenditures.
Our graph tracking US independent oil and gas producers’ planned spending cuts and the Bloomberg consensus estimate for 2015 output growth tells the tale.
Note that many of the production declines in this graph reflect the effect of asset divestments—another strategy to shore up balance sheets and fund drilling activity—not an actual reduction in output.
Thus far in 2015, US upstream operators have raised significant capital in an effort to plug their widening cash flow shortfalls and to offset reductions to their credit facilities when their lenders reevaluate their borrowing bases in spring and fall.
All told, these exploration and production companies have issued or have filed to sell $10.431 billion worth of common shares and $18.975 billion in bonds—almost $30 billion in capital.
As long as the public and private markets remain open, expect more US upstream operators to issue equity and bonds.
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Elliott and Roger on Dec. 21, 2017
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