At times in the past, exploration and production companies (E&Ps) have been viewed as the riverboat gamblers of U.S. commerce. Given the right market signals, producers have been known to go “all in,” tapping credit markets in the equivalent of pawning grandma’s jewelry to win big by filling an inside straight. And, of course, they’ve sometimes paid the bitter price when commodity markets dealt the inevitable bad hand. So, the obvious question when prices and cash flows dipped earlier this year after producers raised capital investment by an average 40% is whether this is déjà vu all over again. Is the industry once again piling on too much debt? Today, we look at the debt levels of the 43 U.S. E&Ps we’ve been tracking.
Earlier this year, we conducted an in-depth analysis of these same 43 E&Ps in our Piranha! market study. We found that E&Ps displayed a new and welcome discipline in response to the oil price plunge in late 2014 through mid-2016. As a result, they emerged from the crisis in a remarkably solid financial position. As we explained in subsequent blogs, our universe of E&Ps generated $9 billion in profits in the first quarter of 2017 after more than $160 billion in losses in 2015-2016. With prices recovering, they boosted their 2017 capital budgets by 40% after slashing spending by 70% over the previous two years. However, in early March 2017, oil prices started falling again and subsequently seesawed higher and lower until the price for benchmark West Texas Intermediate (WTI) finally hit its 2017 low of about $43/bbl in June. Profits and cash flows dipped in the second quarter, although the industry remained in the black. Despite the price volatility, producers decided to maintain their accelerated budgets, as we outlined in Rock Steady. We thought it would be a good idea to revisit the balance sheets of the 43 E&Ps to see if any of these companies have been eroding their financial positions.
We collected data from the second quarter 2016 and 2017 statements of our 43-company universe. Where appropriate, we adjusted the balance sheet data for significant acquisitions, divestitures, stock issuances or buybacks to create pro forma balance sheets with the most accurate, current view of each company’s financial position. The most significant pro forma adjustment during the second quarter of 2017 was EQT Corp.’s purchase of Rice Energy for $8.2 billion, which is expected to close in the first half of this month (November 2017).