US Shale struggles to reinvent himself

The US oil industry continues to exercise capital discipline, a concept that was rather unpopular in the shale zone prior to the 2020 crash and oil crisis. Since last year’s market collapse and the bankruptcies it claimed, America’s exploration and production companies have dramatically shifted their priorities. No one is drilling for the sake of growing output because demand is still recovering from the 2020 decline. But everyone wants to attract shareholders and reward existing shareholders with more dividends and healthier balance sheets.

Oil at $ 60 – and over $ 70 in recent weeks – is generating record free cash flow for many U.S. oil and gas companies. But instead of repeating the mistakes of the past of investing cash flow in new boreholes or even borrowing to spend beyond their cash flow, companies are paying down debt and postponing debt deadlines by issuing debt. new obligations.

U.S. oil and gas companies are taking advantage of high oil prices and historically low interest rates to seek funding. And they’re able to get that funding because Wall Street has seen their capital discipline hold; drillers are not using the money to increase drilling activity, at least not too much.

Overall, the U.S. shale patch issued up to $ 42 billion in new bonds in the first half of the year, much of which was used to pay off debt with higher interest, estimates. Bloomberg. show.

In March, rising oil prices and low interest rates prompted independent listed U.S. oil producers to increase the most funding via debt and equity issues since August of last year, the EIA said in April.

This time around, the borrowed money is being used to repay previously used credit facilities or bonds, not the relentless drilling of new wells and the pursuit of record growth in production.

Low yields on corporate bonds also helped lower interest rates on new bonds and lower the cost of issuing debt, the EIA noted.

Historically low interest rates are a further incentive for US shale drillers to take on new debt and refinance existing liabilities. Today, it’s as cheap for the U.S. energy sector to take on new debt as it was seven years ago, when oil cost $ 100 a barrel, according to Bloomberg Intelligence.

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Debt repayment and shareholder performance are now top priorities for U.S. shale companies.

North American oil and gas producers have used most of their free cash flow to repay net debt in the first quarter of 2021 since 2018, according to Evaluate Energy estimates.

“The group of 86 companies have used this free cash flow to pay off a much larger amount of debt than usual,” Evaluate Energy said in a June report.

Debt reduction and shareholder returns remain key priorities for the U.S. shale for the rest of the year, executives at some of the largest companies said in second-quarter earnings calls earlier this month. this.

“As the double premium enhances our potential for generating free cash flow, we remain committed to using that cash to maximize shareholder value. Regular dividends, debt reduction, special dividends, opportunistic buyouts and small, targeted acquisitions with high yield are our priorities ”, noted Bill Thomas, President and CEO of EOG Resources.

“We prioritize debt repayment and balance sheet first, which is why we have underinvested,” said the CEO and President of APA Corporation. Jean Christmann noted.

“[W]We’re sort of in a new paradigm, which I think makes stock buybacks maybe feel a little different than they historically have been ”, noted Dane Whitehead, Executive Vice President and Chief Financial Officer of Marathon Oil Corporation.

“In the new E&P model, where greater capital discipline across commodity cycles provides a platform for redemptions valued over time. Whereas previously in an environment of improving prices, the call for growth would have sent capital to the forest or acquisitions rather than to shareholders, ”noted Whitehead.

By Tsvetana Paraskova for OilUSD

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