Energize Weekly, October 7, 2020
After trying to cut spending and debt, shale drillers are seeing a wave of red ink and increasing liability in 2020 as a result of the novel coronavirus pandemic and the weak oil and gas prices it has spawned, according to two financial analyses.
In 2019, 39 oil-focused exploration and production (E&P) companies evaluated by BTU Analytics had managed to keep debt flat, but this year “largely out of necessity” they have borrowed $8.2 billion.
“The rapid impacts of COVID-19 and the resulting plummet in crude pricing led most operators to cut dividends, halt share repurchases and, most importantly, raise debt. That increase in debt that many oil-focused E&Ps relied on to improve liquidity may take years to correct,” BTU Analytics said.
At the same time, even with sharp reductions to capital expenditure budgets, 34 shale E&P companies tracked by the Institute for Energy Economics and Financial Analysis (IEEFA) spent $3.3 billion more on capital projects in the second quarter of 2020 than they took in from selling oil and gas.
That performance “followed a decade of negative free cash flow for the industry,” the IEEFA analysis said.
After growing investor concerns about balance sheets performance, the drillers have been moving away from an emphasis on rapid growth in production to a business model emphasizing capital efficiency and returning cash to investors.
In 2019, the operators assessed by BTU Analytics bought back almost $7.7 billion in stock and paid out about $4.3 billion in dividends.
The combination of weak demand and low prices for oil and gas, in the face of the pandemic, are upending their plans.
“As the COVID-19 pandemic hit, many operators turned to their credit facilities to improve their liquidity,” BTU Analytics said.
Among the ten largest increases in debt by operators – including Apache Corp., Noble Energy, Continental Resources, Hess Corp. and Extraction Oil and Gas – half relied on revolving credit facilities.
“These increases in debt are generally short-term in nature but could potentially lead to future increases in long-term debt,” BTU Analytics said.
Apache, for example, announced $1.25 billion notes offering on August 3, which will in part be used to pay down its revolving credit facility.
“If E&Ps do decide to increase their long-term debt down the road to pay down a revolver, they could be set up for a longer road to recover, one with higher leverage and interest payments,” BTU Analytics said.
Meanwhile, shale-oriented drillers could not cut expenses fast enough in 2020 to keep up with falling oil and gas prices, IEEFA said. In April, oil prices briefly turned negative and in September, Henry Hub natural gas prices hit a 30-year low.
The result was that even with a 45 percent cut in capital spending in 2020, year-on-year, companies still posted large negative cash flow in the second quarter as falling commodity prices reduced revenue by 64 percent compared to the first quarter of the year.
Twenty-seven of the 34 companies IEEFA reviewed posted operating losses. Extraction Oil and Gas with $360 million in negative cash flow topped the list, followed by Continental Resources with a $334 million deficit between expense and revenues.
Three other producers – Noble Energy, Marathon Oil ad Hess Corp. – also had negative cash flow exceeding $300 million.
“The oil and natural gas industry was already headed toward relying on capital from cash flow instead of debt and equity, and it was capital constrained even before the current market turbulence,” according to the U.S. Energy Information Administration. “The current economic downturn has accelerated and exacerbated this trend.”
