US independents keep promise of lowering debt

US upstream operators are shoring up balance sheets as recovering crude prices boost cash flows

US oil and gas producers are largely sticking with their promise of lowering debt as recovering crude prices boost cash flows amid a tight cap on spending.

Shoring up balance sheets remains imperative for a US upstream industry under continued pressure from investors to improve returns. Shareholder dissatisfaction is understandable as leading US liquids producers' year-to-date stock performance has improved by only 11pc, US bank Tudor Pickering Holt says, compared with a 20pc increase in Nymex WTI crude prices. Aside from higher oil revenues, producers have used proceeds from large asset sales to reduce borrowing. But as the scope for repeated large divestments narrows, higher crude prices may be key for companies to continue with their debt reduction programmes.

Leading US independent ConocoPhillips has perhaps been the most successful in drastically reducing its net debt, to less than $12bn in the first six months of this year against $13.4bn at the end of 2017. This followed restructuring last year that included selling its Canadian oil sands business. Its total debt over the same period fell to $14.9bn from $19.7bn, a target achieved 18 months ahead of schedule, chief executive Ryan Lance says.

Key Bakken producer Continental Resources is working towards its target of reducing its net debt to $5bn or lower, from just over $6bn as of 30 June. A joint venture with Canada's Franco-Nevada in some of its Scoop and Stack acreage in Oklahoma is expected to help in reducing debt. It expects year-end net debt to be $5.5bn-5.7bn, with a further reduction anticipated in 2019. The venture "leverages Continental's proprietary knowledge and expertise to create value while minimising our capital required to grow this venture and still providing for debt reduction", chief financial officer John Hart says.

Anadarko Petroleum repaid $500mn in the second quarter. But its net debt at the end of June rose to $14bn against $13.2bn at the end of December because it had negative free cash flow in the first six months of this year and bought back $2bn of shares. Even so, in a $50/bl-plus environment Anadarko is "throwing off a lot of free cash flow — there is tremendous durability to buying back stock, retiring debt and periodically looking at increasing our dividend", chief executive Al Walker says. That, coupled with a steady output growth rate at $50/bl, "is a pretty good business model", he says.

Setting the pace

Hess reduced its total debt to $6.4bn in January-June against $6.98bn as of the end of December. But the company had to dip into its cash reserves, leaving its net debt $1.4bn higher. And some firms, such as EOG Resources, will pace debt reduction plans. The company aims for a cut of $3bn over the next four years, from net debt of $5.6bn at the end of 2017. "We will just take one year, one quarter, at a time," chief executive Bill Thomas says.

Chesapeake, one of the most debt-laden independents, is moving away from a strategy of reducing debt through asset sales. It has shed around $12bn in assets in the past five years, most recently agreeing to sell its Utica shale assets to privately-held Encino Acquisition Partners for $1.9bn. This will be the last major asset sale aimed at reducing company debt. "This transaction marks the conclusion of Chesapeake's strategy of asset sales being the primary driver of debt reduction," chief executive Doug Lawler says. Even so, the firm has issued fresh debt for a total of $1.25bn, due in 2024 and 2026. The proceeds will repay borrowings under a term loan due in 2021.

Other companies may be open to taking on more debt next year amid firmer oil prices and improving business conditions.