Google Play icon

Debt service uses a rising share of U.S. onshore oil producers’ operating cash flow

Share
Posted September 21, 2015

Results from second-quarter 2015 financial statements of a number of U.S. companies with onshore oil operations suggest continued financial strain for some companies. Low oil prices have significantly reduced cash flow for U.S. oil producers, and to adjust to lower cash flows, companies have reduced capital expenditures and raised more cash from debt and equity.

Image credit: U.S. Energy Information Administration

Image credit: U.S. Energy Information Administration

Because of the large amount of debt accumulated from past years, a higher percentage of operating cash flow is being devoted to servicing debt. Debt service payments consist of principal repayment to creditors and typically are fixed in both amount and frequency, agreed upon before a company receives a bank loan or issues a bond.

Some companies have been able to refinance their debt—that is, paying off old debt and taking on new debt, perhaps with a different interest rate or longer maturity. This option has increasingly become more expensive, because interest rates for energy company debt issuance have risen as crude oil prices declined, and rates are now higher than for any other business sector. The spread for energy company bond yields with a credit rating below investment grade averaged 11 percentage points above the risk-free rate since August, indicating higher interest rates for energy companies.

Image credit: U.S. Energy Information Administration

Image credit: U.S. Energy Information Administration

With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased recently. For the previous four quarters from July 1, 2014 to June 30, 2015, 83% of these companies’ operating cash was being devoted to debt repayments, the highest since at least 2012. As the share of debt repayment to operating cash flow increases, a company is left with less cash to use for investment opportunities, dividends, or savings for future use.

Companies that use bank credit facilities to meet their short-term cash requirements face redeterminations twice a year. With next month’s round of redeterminations—which considers the valuation of companies’ reserves as collateral—some companies may face challenges in raising enough cash to maintain capital expenditures and meet liabilities.

More information about the effect of lower oil prices on U.S. onshore oil companies is available in This Week in Petroleum.

Source: EIA

Featured news from related categories:

Technology Org App
Google Play icon
85,500 science & technology articles

Most Popular Articles

  1. New treatment may reverse celiac disease (October 22, 2019)
  2. The World's Energy Storage Powerhouse (November 1, 2019)
  3. "Helical Engine" Proposed by NASA Engineer could Reach 99% the Speed of Light. But could it, really? (October 17, 2019)
  4. Plastic waste may be headed for the microwave (October 18, 2019)
  5. Universe is a Sphere and Not Flat After All According to a New Research (November 7, 2019)

Follow us

Facebook   Twitter   Pinterest   Tumblr   RSS   Newsletter via Email