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.
In our recent blog on E&P capital allocation, Spread It Around, we pointed out that the oil and gas industry historically outspent cash flow in the decade leading up to the 2020 pandemic. As shown in Figure 1 below, that piled on debt — the E&Ps we follow averaged a collective $140 billion-plus of debt in the 2014-18 period and their debt spiked to $167 billion in 2019 (blue bars and left axis), or about $3.50 of debt per barrel of oil equivalent proved reserves (boe; orange line and right axis). That boosted the sector-wide debt-to-capital ratio to more than 35% four years ago. (The debt-to-capital ratio is determined — you guessed it — by dividing a company’s total debt by its total capital, the latter of which is the sum of its total debt and its total shareholder equity.)
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