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Improved financial situation for US oil companies

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Oilfield Technology,

Although the crude oil price decline since 2014 has led to significant reductions in operating cash flow for US oil companies, their immediate financial situations are improving. As oil companies' spending falls and crude oil prices increase, the need for oil companies to find external sources of funding may decline, which could reduce financial strain in the coming quarters.

1Q16 financial results from US onshore producers reveal an improving balance between capital expenditure and operating cash flow. Although operating cash flow was the lowest in any quarter in the past five years, larger reductions to capital expenditure brought these companies closest to self-finance (when capital investment can be paid for entirely from operating cash flow). With crude oil prices such as the global benchmark Brent price averaging over US$45/bbl in the second quarter – a 34% increase from 1Q16 – cash flow may improve and help offset declining revenue from lower production.

The difference between operating cash flow and capital expenditure – known as free cash flow or the financing gap – represents whether a company can pay for its investment through its after-tax profits. Over the past five years, companies substantially increased investment spending to raise production. In 2012 and early 2013, operating cash flow was about half of capital expenditure, making external finance necessary to pay for investment in production growth.Sources of cash that do not come from operating activities typically come from:

  • Selling property, equipment, other business segments, or other assets.
  • Issuing shares of stock.
  • Taking on debt, such as through borrowing from a bank or selling a bond.

Operating cash flow has declined over the past year, but it nonetheless has covered an increasing share of capital expenditure as companies are reducing their investment budgets more quickly. Smaller investment budgets are lowering the amount of cash US onshore oil producers need to raise through outside sources.

Capital expenditure decreases, however, may lead to further declines in production for US oil producers. 1Q16 was the first y/y decline in crude oil and other liquids production for these companies in the past five years, driven by declines from existing fields and a lack of new well drilling. Falling production would likely reduce revenue and cash flow absent an increase in crude oil prices.

The companies included in this analysis are 39 public US crude oil producers operating only onshore fields. Their collective production averaged 2.1 million bpd, or approximately 30% of US Lower 48 production in 1Q16. These companies will release 2Q16 results in mid-August.

Adapted from press release by Rosalie Starling

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