Much has been made over the past year about US E&Ps exercising financial discipline by moderating their growth investments, paying down debt and returning substantial portions of their free cash flow to investors in the form of dividends and share buybacks. shares Therefore, concerns in the wider economy that the banking crisis and the specter of an impending recession could restrict access to capital markets should not be a major concern for the 41 oil and gas producers we monitor , right? As we discuss in today’s RBN blog, the answer is not a simple yes or no. The bad news is that the E&P sector still has some debt, and several of the companies we follow have added to their debt load in 2022. The good news is that overall debt levels have come down and the net present value (NPV) of oil and gas reserves, a key factor in determining how much debt an E&P can carry, has soared, which may make it easier for them to borrow money if they need to.
In our recent blog on E&P capital allocation, Spread it around, we noted that the oil and gas industry historically spent cash flow in the decade leading up to the 2020 pandemic. As shown in Figure 1 below, the accumulated debt: E&Ps we track had a averaged over $140 billion in collective debt over 2014-18 and their debt rose to $167 billion in 2019 (blue bars and left axis), or approx. $3.50 debt per barrel of proven oil equivalent reserves (bop; orange line and right axis). This pushed the debt-to-equity ratio of the entire sector to more than 35% four years ago. (The debt-to-equity ratio is determined, you guessed it, by dividing a company’s total debt by its total equity, the latter of which is the sum of its total debt and its total shareholders’ equity.)
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