The U.S. oil industry continues to show capital discipline—a concept that was rather unpopular in the shale patch prior to the 2020 oil crash and crisis. Since last year’s market collapse and the bankruptcies it claimed, U.S. exploration and production companies have changed their priorities quite dramatically. No one is drilling for the sake of production growth as demand is still recovering from the 2020 decline. But everyone wants to attract shareholders and reward existing stockholders with more dividends and healthier balance sheets.
Oil at $60—and at $70-plus in recent weeks—is generating record free cash flows for many U.S. oil and gas firms. But instead of repeating past mistakes—namely, plowing the cash flows into new drilling or even borrowing to spend beyond their cash flows—companies are paying down debts and postponing debt maturities by issuing new bonds.
U.S. oil and gas firms are taking advantage of the high oil prices and historically low-interest rates to seek financing. And they are able to obtain this financing because Wall Street has seen that their capital discipline is holding; drillers aren’t using the money to increase drilling activity—at least not too much.
As a whole, the U.S. shale patch issued as much as $42 billion in new bonds in the first half of the year, a large part of which was used to retire debt with higher interests, Bloomberg estimates show.
In March, higher oil prices and low-interest rates prompted listed independent U.S. oil producers to raise the most financing via debt and equity issues since August last year, the EIA said in April.
This time around, the borrowed money is being used to repay previously drawn credit facilities or bonds, not for relentless drilling of new wells and chasing record production growth.
Low corporate bond yields have also contributed to lower interest rates on new bonds and reduce the cost of issuing debt, the EIA noted.
Historically low interest rates give additional incentives to U.S. shale drillers to raise new debt and refinance existing liabilities. Currently, it’s as cheap for the U.S. energy sector to raise new debt as it was seven years ago, when oil was $100 per barrel, according to Bloomberg Intelligence.
Debt repayment and shareholder returns are now the key priorities of the public U.S. shale firms.
North American oil and gas producers used the largest share of their free cash flows to repay net debt in the first quarter of 2021 since 2018, as per Evaluate Energy estimates.
“The group of 86 companies used this free cash flow to pay off a far greater amount of debt than has been typical,” Evaluate Energy said in a June report.
Debt reduction and shareholder returns continue to be key priorities for U.S. shale for the rest of the year, executives at some of the top firms said on the Q2 earnings calls earlier this month.
“As double premium improves our potential to generate free cash flow, we remain committed to using that cash to maximize shareholder value. The regular dividend, debt reduction, special dividends, opportunistic buybacks and small high-return bolt-on acquisitions are our priorities,” said Bill Thomas, chairman and CEO at EOG Resources.
“We’re prioritizing debt pay down and the balance sheet first, which is why we’ve been underinvesting,” APA Corporation’s CEO and President John Christmann said.
“[W]e’re kind of in a new paradigm, which I think makes share repurchases feel a little different maybe than they have historically,” said Dane Whitehead, executive vice president and chief financial officer for Marathon Oil Corporation.
“In the new E&P model, where more capital discipline through commodity cycles provides a platform for ratable repurchases over time. Whereas, previously in a price improving price environment, the call for growth would have sent the capital to the drill bit or acquisitions as opposed to back to shareholders,” Whitehead noted.
By Tsvetana Paraskova for Oilprice.com
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