debt-to-capital ratio

There’s been a lot of talk over the last year or so about U.S. E&Ps exerting financial discipline by moderating their investments in growth, paying down debt and returning substantial portions of their free cash flow to investors in the form of dividends and stock buybacks. So, worries in the broader economy that the banking crisis and the specter of a looming recession may restrict access to capital markets shouldn’t be a major concern for the 41 oil and gas producers we monitor, right? As we discuss in today’s RBN blog, the answer isn’t a simple yes or no. The bad news is that the E&P sector still holds quite a bit of debt and that several of the companies we track added to their debt load in 2022. The good news is that total debt levels are down and that the net present value (NPV) of oil and gas reserves — a key factor in determining how much debt an E&P can handle — has soared, which may make it easier for them to borrow money if they need it.

Credit is the lifeblood for most individuals and corporations, especially capital-intensive entities like oil and gas producers. The credit score that so strongly impacts our ability to finance a house or car, get approved for an apartment, or qualify for our dream job, is not simply based on how much we own, but several other factors, including metrics that compare our debt load with our net worth and the assets being financed, and consider the percentage of our income needed to service that debt. For E&Ps, similar metrics involving the value of their oil and gas reserves and the relationship between their income and interest payments determine the size of their revolving credit facilities, their ability to access debt capital markets, and the cost of capital they pay. Today, we analyze COVID’s impact on the credit metrics of oil and gas producers and discuss the pace and scope of the ongoing recovery.

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.