Energy businesses took on $106 billion in net debt in the year to March as they offload their assets.
It seems that the world’s leading
oil and gas companies are selling their assets more than ever before in a bid
to cover a shortfall in cash. This move is causing experts to question whether
some parts of the industry are sustainable in the long-term.
According to an international
review of 127 companies by the US Energy Information Administration (EIA), net
debt has increased by $106 billion in the year to March, as the cost of machinery and
exploration rockets rises. Energy companies are also still faced with dishing out
These costs mean that at the same
time as racking up this year’s debt, they sold off around $73 billion of their
Writing in the Daily Telegraph,
Ambrose Evans-Pritchard pointed out that this is a major departure in historical
trends. Traditionally, this type of shortfall only tends to occur either during
recessions or immediately following them, whereas the economy is currently five
years into a period of expansion.
This is apparently due to a
significant rise in costs, coupled with a plateau in revenues that has been in
place since 2011. Revenues have stagnated at $568 billion over the past year,
with oil taking around $100 per barrel. Costs are rising due to the fact that
the easy locations to source their produce have been exhausted, meaning they
are now having to explore fields in increasingly tricky locations.
Energy businesses have seen the
gap between their costs and profits soar in recent years. Photo: Shutterstock
Indeed, the EIA reported that the
shortfall between earnings and expenditure has jumped from $18 billion in 2010 to
$110 billion over the past three years. Companies have been forced into heavy
borrowing in order to pay consistent dividends and buy their own shares back.
It is estimated an average of $39 billion has been spent on repurchases every year
The EIA commented that this
increase in debt is not necessarily a negative indicator, and could even be a
good move for some if interest rates are low.
New figures have shown an upswing
in “tight oil” production, which has increased to 3.7 million barrels a day, up
from half a million in 2009. In addition, shale gas output has soared from
three billion cubic feet to 35 billion in the past seven years. According to
the EIA, America is set to further its lead as the largest producer of oil and
gas combined in the world - significantly ahead of Russia or Saudi Arabia.
Despite this, the administration
pointed out that “continued declines in cash flow, particularly in the face of
rising debt levels, could challenge future exploration and development”. The
costs of exploring and drilling alone have seen companies drive up their
long-term debt by nine percent in 2012, and 11 percent over the past year.
Steven Kopits from
Douglas-Westwood commented that the productivity of new capital spending had
dropped by a factor of five since the year 2000.
He said: “The vast majority of public oil and gas companies
require oil prices of over $100 to achieve positive free cash flow under
current capex and dividend programmes. Nearly half of the industry needs more
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