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15 August 2014

Energy businesses taking on more debt as costs rocket

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 generous dividends.

These costs mean that at the same time as racking up this year’s debt, they sold off around $73 billion of their assets.

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 since 2011.

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 than $120”. 

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