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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Is This Trend A Killer for Oil and Gas?

Very interesting research released last week by the U.S. Energy Information Administration. Showing that the domestic E&P sector may be headed for some difficult times.

The Administration calculated the spending habits of oil and gas firms operating within the U.S. Tallying both incoming operational cash flow and outgoing capital expenditures for these companies.

The results are surprising. Revealing that today’s oil and gas sector is spending well beyond its means.

Just look at the chart below. Showing that 2013 operational cash flow for the industry ran approximately $575 billion—while spending ("uses of cash") averaged just under $700 billion. Meaning that firms spent over $100 billion more than they made from operations.

Of course, these metrics don’t tell the complete story when it comes to company financials.

E&P firms could, for example, make up the spending shortfall by selling assets and using the profits to shore up their bank accounts.

But the EIA research reveals that’s not the way many companies have been doing things. With numerous firms instead making up the difference in spending through increased bank borrowing.

That means debt loads are growing across the industry. Which sets up some interesting dynamics for the sector going forward.

A lot is now riding on the future performance of U.S. fields. With today’s E&P spenders basically betting that increased capital outlays will pay for themselves through rising production and profits down the road.

But the EIA numbers make this proposition look somewhat dubious. As the chart clearly shows, operational cash flows have been largely flat-lined for the last two years. With increased spending no longer giving the financials a lift.

That’s a very worrisome trend. Which could see today’s big spenders left with high and perhaps even unserviceable debt loads as oil and gas fields “run on the treadmill”.

This may be where the quality managers in the shale patch start to separate themselves from the pack.

Here’s to living within your means,

Dave Forest




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Leave a comment
  • Andrey Palyura on August 07 2014 said:
    It is very interesting and controversial observation which provoke thoughts on oil&gas; future. Thanks.
  • Lee James on August 09 2014 said:
    Dave, The same "Today in Energy" article from the EIA seems to put a positive spin on the borrowing. The article concludes with this statement:

    "An increase in debt is not necessarily a negative indicator. Low borrowing rates have allowed companies to use outside sources of capital (debt) to meet their spending needs. Production in North America, where many of the reporting companies have major operations, has increased dramatically in recent years. Using debt to fuel growth is a typical strategy, particularly among smaller producers. The increased debt load is anticipated to be met with increased production, generating more revenue to service future debt payments."

    Like your post, Dave, I frequently post comments cautioning investors. In the very least, caution is indicated.

    I think many would argue that unconventional petroleum is an emerging industry that requires up-front investment. Sticking your neck out by borrowing and selling assets is just part of the game.

    Stats for 2014 seem to show improvement in the finances of the Independent companies, with some poster-child standouts like EOG Resources. I wonder if the challenge is going to be in "getting there" with the technology and techniques, just in time for the resource to wind down... or falling support in the marketplace for high crude prices.

    Seems prudent to hedge our bets and not put so many eggs in the unconventional petroleum basket. Risks are: 1) extent of the resource, 2) high extraction and transport cost, 3) regulations, including a possible price on carbon, and 4) ability of consumers to purchase petroleum products.

    I think it is time to seriously develop alternatives to fossil fuels.

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