By Tsvetana Paraskova
• American oil and gas producers have slashed debt by more than $26 billion since the end of 2019.
• The structure shift from spending to exercising capital discipline has been celebrated by shareholders.
• Moody’s has revised up its ratings of a number of U.S. producers in recent months, citing debt reduction as a primary factor for the upgrades.
North America’s oil and gas producers have reduced their total debts by $26 billion since the end of 2019 as the shale industry made the structural shift from spending to grow production to increasing shareholder returns and strengthening balance sheets. The significant debt reduction at North American oil and gas producers, coupled with capital discipline at most shale firms, points to lasting gains for the credit quality of more than 60 such exploration and production firms rated by Moody’s, the credit rating agency said in a report this week.
The industry cut debt by 11% since the start of the pandemic, thanks to the capital discipline that has held for more than two years now and to the high cash flows producers have generated this year as oil and gas prices soared. The 64 North American E&P firms rated by Moody’s now have $217 billion of outstanding debt, according to the agency’s report cited by The Wall Street Journal.
Moody’s has revised up its ratings of a number of U.S. producers in recent months, citing debt reduction as a primary factor for the upgrades.
In upgrading ConocoPhillips, Moody’s Vice President Sajjad Alam said last month that the rating action reflected ConocoPhillips’s “larger, lower cost and more resilient asset base as well as reduced financial leverage that should provide greater flexibility in managing future price volatility and energy transition risks.”
Comstock Resources was upgraded in June, with Moody’s analyst Jonathan Teitel saying, “Comstock’s ratings upgrade reflects debt reduction and our expectation for further debt reduction and positive free cash flow over the remainder of 2022 and 2023 supported by strong natural gas prices and management’s demonstrated commitment to debt reduction.”
Coterra Energy also saw its ratings upgraded two weeks ago.
“The company’s low debt burden and manageable maintenance capital spending requirements allow it to prioritize free cash flow generation through natural gas price cycles, supporting the company’s investment grade credit profile,” Moody’s said.
As a whole, U.S. shale producers reported record or close to record earnings and cash flows for the second quarter amid soaring commodity prices. The record-free cash flow now goes to paying down debts and paying shareholders, who are finally seeing the rewards of being invested in the shale patch after years of disappointing returns when companies prioritized production to payouts.
With high oil and gas prices and an energy crisis in Europe, the market for U.S. oil and gas is there, and E&P firms are set for record cash flows this year and next, analysts say.
With capital discipline and the desire to strengthen balance sheets, the U.S. shale industry could potentially become debt-free by early 2024 if prices stay strong and discipline prevails, Deloitte said in a report in August.
The North American upstream industry cumulatively generated only $47 billion in free cash flows over the 2010–2020 decade due to losses in shale plays.
“However, the industry is expected to generate $600 billion in free cash flows just between 2021– 2022, a 13-time quantum jump over the cumulative cash flows made between 2010–2020,” Deloitte said. The jump in FCF will be primarily led by shale producers.
The shale patch, which generated negative cash flows in nine out of the last ten years, will likely see record-high free cash flows in 2021-2022 that could overcome the decade-long loss of $300 billion, according to Deloitte.
Despite the record cash flows, the shale industry’s discipline and focus on paying down debts means that U.S. producers are unlikely to come to the rescue of global oil supply, which is set to be reduced with OPEC+’s major cut announced last week and the upcoming EU embargo on Russian oil imports by sea. Supply chain and drilling services constraints are also weighing down on the U.S. industry’s ability to boost production significantly in the near term.
Heading into the 2023 budget announcements, “given the constraints around investment and activity, a return to the jet-propelled expansion of the 2018-19 still seems unlikely,” Ed Crooks, Vice-Chair, Americas, at Wood Mackenzie, said at the end of September.
“As consumers weigh up the outlook for oil supply next year, they should be ready for the possibility that US producers will again be jogging, rather than charging, to help them.”