US Shale’s debt detox is a huge win for shareholders

North American 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 ramp up production to higher returns for shareholders and strengthening balance sheets.

Significant debt reduction for North American oil and gas producers, coupled with capital discipline in most shale companies, points to sustained gains in credit quality for more than 60 of these exploration companies and production rated by Moody’s, the rating agency said in a report. this week.

The industry has reduced its debt by 11% since the start of the pandemic, thanks to the capital discipline that has been maintained for more than two years now and the strong cash flows that producers have generated this year as the Oil and gas prices were skyrocketing. The 64 North American exploration and production companies rated by Moody’s now have $217 billion in outstanding debt, according to the agency’s report cited by the Wall Street Journal.

Moody’s has upgraded its ratings of a number of U.S. producers in recent months, citing debt reduction as a primary factor in the upgrades.

On ConocoPhillips’ upgrade, Moody’s Vice Chairman Sajjad Alam said last month that the rating action reflected “ConocoPhillips’ broader, lower cost and more resilient asset base, as well reduced financial leverage which 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 expectations for further debt reduction and a stream of Free cash positive over the remainder of 2022 and 2023, supported by strong natural gas prices and demonstrated management commitment. to debt reduction.

Coterra Energy also saw its ratings upgraded two weeks ago.

“The company’s low leverage and manageable maintenance capital expenditure requirements allow it to prioritize free cash flow generation through natural gas price cycles, supporting the company’s credit profile. investment grade company,” Moody’s said.

Overall, U.S. shale producers reported record or near-record second-quarter earnings and cash flow amid soaring commodity prices. The unprecedented cash flow is now being used to service debt and pay shareholders, who are finally seeing the benefits of being invested in the shale play after years of disappointing returns when companies prioritized production over to payments.

With high oil and gas prices and an energy crisis in Europe, the U.S. oil and gas market is here, and E&P companies are expected to post record cash flow this year and next, analysts say.

With capital discipline and a drive to strengthen balance sheets, the U.S. shale industry could potentially become debt free by early 2024 if prices remain high and discipline prevails, Deloitte said in a report. in August.

The North American upstream industry cumulatively generated only $47 billion in free cash flow over the decade 2010-2020 due to losses in shale plays.

Related: OPEC+ Oil Production Hits Highest Level Since April 2020 But Still Below Target

“However, the industry is expected to generate $600 billion in free cash flow just between 2021 and 2022, a quantum leap of 13 times from the cumulative free cash flow achieved between 2010 and 2020,” Deloitte said. The jump in FCF will be mainly led by shale producers.

The shale patch, which has generated negative cash flow in nine of the past ten years, will likely experience record free cash flow in 2021-22 that could overcome the $300 billion loss over a decade, according to Deloitte. .

Despite record cash flows, shale industry discipline and a focus on debt repayment mean U.S. producers are unlikely to come to the rescue of global oil supplies, which are expected to reduced with the major OPEC+ cut announced last week and the upcoming EU embargo on Russian oil imports by sea. Supply chain and drilling services constraints are also weighing on the ability of US industry to significantly increase production in the near term.

As the 2023 budget announcements approach, “given investment and activity constraints, a return to reaction-propelled expansion from 2018-19 still seems unlikely,” said Ed Crooks, vice president. , Americas, at Wood Mackenzie. end of September.

“As consumers assess the outlook for oil supplies next year, they should be prepared for the possibility that U.S. producers will once again jog, rather than charge, to help them out.”

By Tsvetana Paraskova for Oilprice.com

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