US oil and gas explorers and producers have not only recovered financially from the pandemic-related downturn, but their financial standing has surpassed pre-COVID levels.
The Energy Information Administration reported that third-quarter results for 50 E&P companies showed they used improved cash flow from operations to increase capital expenditures and grow shareholder returns. The report suggests capital expenditures could increase 35% compared to 2021 due to more drilling and increased drilling costs related to supply chain restraints.
The study also found these companies continue to reduce their overall debt, which suggests more profits could be directed to shareholder returns such as dividends and share repurchases in the future.
“The report is not surprising given the increase in production and the high price of crude during the reporting period,” Mickey Cargile of Cargile Investment Management told the Reporter-Telegram by email. “The capital discipline of the companies is notable. Companies are paying down debt and returning cash to shareholders that previously would have been used for additional drilling activity.”
He added, “As we see crude prices decline recently, the drilling constraints appear wise.”
Alex Beeker, Principal Analyst of Corporate Research at Wood Mackenzie, told the Reporter-Telegram by email a key takeaway isn’t just the magnitude of cash flow from operations, but how its being allocated. A chart shows year-to-date through the third quarter sources and uses of cash flow for 38 E&P companies the company tracks tallied about $115 billion of cash flow from operations, already more than 2021.
“About $41 billion has gone to capital expenditures, $22 billion to dividends, $20 billion to share repurchases – big jumps in the second and tbhird quarters, $5 billion to cash acquisition and $22 billion to debt reduction. The last one is more interesting to me. Because it’s starting to slow as companies approach healthy balance sheet levels.”
If prices stay where they are, he said, there could be an additional $22 billion of cash flow freed up in 2023. “Now which buckets does this go toward? Most E&Ps have committed to a formulaic variable dividend, so a good amount will go there. But there should also be plenty room for budget increases and more cash acquisitions. Share repurchases leave companies an ‘out’ if they feel too non-committal to the previous two buckets,” he wrote.
The 50 publicly traded companies analyzed in the EIA report collectively produced about 4.2 million barrels a day of crude oil or 35% of all crude produced in the US in the third quarter.
The West Texas Intermediate price averaged $93.07 per barrel in the quarter, up 32% compared to the third quarter of 2021 but 15% below the second quarter average. With the higher prices, cash from operations for the 50 companies increased 86 percent or $20.1 billion over the third quarter of 2021 to $43.4 billion.
These companies produced 10% more crude oil – 389,000 barrels – than in the third quarter of 2021. Compared to pre-pandemic levels, third quarter production was 5% or 215,000 barrels lower than the first quarter of 2020.
Capital expenditures increased 89% or $8.7 billion compared with the third quarter of 2021, to $18.3 billion and increased 30% or $4.2 billion compared with the second quarter of this year. Capital expenditures in the third quarter were only 1% or $300 million lower than in the third quarter of 2019, although they were 26% or $6.3 billion lower than the most recent peak in the third quarter of 2018, when crude oil prices averaged $70/b.
The E&P companies decreased their overall debt by $4.2 billion in the third quarter and lowered their long-term debt-to-equity ratio to 47%, the lowest in the past five years. The companies have collectively reduced debt in nine consecutive quarters, with a cumulative decline of $43.1 billion over the past two years. Total debt is now below pre-pandemic levels.
