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Analysis: For US independents, cash is king

21 May 2015 20:37 (+01:00 GMT)
Analysis: For US independents, cash is king

Houston, 21 May (Argus) — US independent oil and gas producers are looking to hold expenses below their cash flows with an aim to ensure that debt levels do not soar as revenues drop.

When crude prices were near $100/bl, US producers focused on boosting output, often with a heavy reliance on debt issuance. In a sharp shift, investors are rewarding companies who are cash flow neutral and can cover capital expenditures and dividends from ongoing operations.

With a prolonged weakness in oil from its 2014 highs in June, cash has become king as producers work to repay their debt and meet expenses as access to cheap funds start to dry up with the US Federal Reserve ending its quantitative easing (QE) measures last year. Companies had leaned heavily on issuing new debt and equity, or seeking private equity investments for a lifeline. But as debt-to-capital ratios worsen across the board, producers are being forced to do more.

Moody's Investors Service has already issued a warning: A default-forecasting model estimates that oil and gas companies with B2 rating or below may see an increase in the default rate from 2.7pc currently to 7.4pc in the next year. A B2 rating is just two steps above default. As of 1 May, oil and gas comprised 15pc of all those rated B3 or lower — the largest for any industry across the US corporate sector and nearly double last year's level of 8pc.

"If oil prices do not rebound as expected or prices move lower, then we expect further downward pressure on companies already on the list and additions from downgraded companies being added," it said.

Anadarko's net debt-to-capital ratio grew to 43pc in the first quarter compared with 29pc a year earlier. ConocoPhillips' debt-to-capital ratio was 31pc in the first quarter versus 28pc a year earlier. Marathon Oil, which increased its revolving credit facility to $3bn through 2020 from $2.5bn, had a debt-to-capital ratio of 20pc compared with 19pc a year earlier. For Apache, the ratio grew to 34pc from 22pc, driven largely by a $2.6bn increase in short-term debt in the first quarter.

But Moody's also said producers with higher rating have so far been able to navigate well by cutting capital expenditures and operating only in areas that offer the best returns.

Key Bakken producer Continental Resources is aiming to be cash flow neutral by mid-year at $60/bl WTI. "Strip prices have risen significantly recently, while costs are continuing to decrease and our level of spending is coming down, so we are closely approximating neutrality now and expect to achieve it shortly," chief financial officer John Hart said.

EOG Resources may have already met that goal. "For the remainder of the year we expect discretionary cash flows and capex to be balanced if oil price remains near recent levels," chief executive William Thomas said. EOG's future activities will also be governed by staying within cash flow. "The goal is to continue to remain capex to discretionary cash flow balanced," he said, adding, at b$65/bl WTI, the company can resume "double-digit growth" within cash flow.

Similarly, Pioneer Natural Resources says its capex "programs will be funded, of course, by our operating cash flow and cash on hand going forward," chief operating officer Tim Dove said. Occidental expects to be neutral by the fourth quarter, assuming $60/bl crude.

Whiting, which acquired Kodiak last year to become the top Bakken producer, expects to "approximate our cash flow at current strip prices," for 2016 with mid-single digit growth, chief executive Jim Volker said.

A positive side-effect of the drive to control spending is a fall in breakeven costs, which is so steep that producers such as Occidental, Devon and Chesapeake have raised their output guidance while cutting capex and lowering rig counts.

Occidental is targeting output growth of between 60,000 and 80,000 b/d of oil equivalent (boe/d) over last year's rate of 591,000 boe/d, 20,000 boe/d higher than its previous guidance. It aims to achieve that even as capex stays below this year's target of $5.8bn.

"We are learning to do more with less and expect continued improvement in productivity through the year," chief executive Steve Chazen said.

Breakeven costs have fallen by an average of $20/bl in a year to $60/bl, according to Goldman Sachs. Further improvements are likely, and they will be so significant that "shale growth and Opec alone can meet global oil demand growth to 2025," rendering many projects elsewhere uneconomic, it said.

mg/dcb



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