Debt load to squeeze shale drillers cash flow and pinch dividends, analysis says
Energize Weekly, March 6, 2019
U.S. shale operators face a cash pinch in 2019 as rising debt servicing will leave them with “barely” enough cash to pay dividends, according to an analysis by Oslo, Norway-based Rystad Energy.
“Indebted shale exploration and production companies (E&Ps) spent the second half of 2018 reducing their leverage ratios,” according to the analysis by Rystad, an energy research and consulting firm. “Yet, many of them will barely generate enough free cash flow to cover debt service payments in 2019.”
Rystad analyzed the 33 largest public shale-drilling companies, representing about 39 percent of shale production.
“The average shale operator has a debt to equity ratio of around 0.6,” Alisa Lukash, a Rystad senior analyst, said in an email to Energize Weekly.
“Shale E&Ps struggle to please equity investors and reduce leverage ratios simultaneously,” Lukash said. “Despite a significant deleverage last year, estimated 2019 free cash flow barely covers operator obligations, putting E&Ps on thin ice as future dividend payments remain in question.”
While larger producers would have less than $1-per-barrel obligation ratio, operators focused in smaller plays—such as Matador Resources in the Haynesville and Cotton Valley plays in Northwest Louisiana and Sanchez Energy in the Eagle Ford—could face a $4-a-barrel charge due to high interest in 2019, Lukash said.
With near-zero interest rates, the shale sector leaned heavily on debt markets to finance growth. The explosion in shale drilling made the U.S. the world’s largest oil producer at the end of 2018.
Overall U.S. crude production reached a weekly record of 12 million barrels per day (bpd), according to the U.S. Energy Information Administration. The rise in production was primarily due to increased output in North Dakota’s Bakken play and in the Permian Basin, which covers part of Texas and New Mexico
The Rystad analysis of companies’ debt maturity profiles showed that more than half of their debt and interest payments are due in the next seven years—peaking in 2022 with $20 billion in maturing debt that year.
The Rystad analysis forecasts that dividend payments will be cut by almost $4 billion, with initial projections of $6.3 billion falling to a probable level of $2.3 billion.
“The obvious gap in expected versus likely dividend payments confirms the industry’s inability to deliver sustained investors’ payback while simultaneously deleveraging,” Lukash added.
Investor ardor for shale operations appears to have waned with bond and equity deals plummeting 66 percent to $22 billion in 2018 compared to $60 billion in 2017, based on data from Dealogic, an international analytics firm.
That was the lowest level of financing in the sector since 2007, according to The Wall Street Journal.