A selection of the top 33 shale oil producers need US$8.3 billion of additional funding on top of US$2.4 billion debt refinancing in a 60 WTI price environment to meet a Capex expectation of US$58.4 billion. These companies represent 61% of US shale oil production in 2018 and were chosen for their focus on oil output.
Without the additional funding and any debt refinancing, Capex would be cut to US$47.7 billion which would bring down the amount of completed wells to 5600 from 6900 with external capital. Additional funding will go towards roughly 16% of 2018 production and USD$10.7 billion underspending will result in a 275 000 bpd volume cut.
Rystad estimates producers will have US$67.2 billion in operating cash flow in 2018. 42% of hedged volumes are secured through swap contracts and have a ceiling of US$52/bbl, resulting in a USD 1.8 billion loss in a USD 60 WTI price environment. Seven companies – Concho Resources, Encana, Diamondback Energy, Devon Energy, Pioneer Natural Resources, QEP Resources, and WPX Energy – will incur the largest hedging losses. The selected 33 oil producers were able to secure 23% of 2018 production with an average floor price of US$50/bbl as of third quarter 2017. Operators are scheduled to pay US$6.8 billion in interest expenses and US$2.4 billion in maturing debt. Applying weighted average DPS over the last twelve months, we expect these operators to pay US$6.2 billion in dividends. This leaves US$50 billion for drilling prior to peer group adjustment for the cash positive operators.
Anadarko, ConocoPhillips and Marathon Oil are expected to have positive cash flow balances amounting to US$2.3 billion in 2018. Unless these companies acquire the acreage of cash negative operators, the gap between Capex and available funds without additional financing will come to US$10.7 billion.
In 2017, 28 shale operators issued equity amounting to US$7.3 billion which is four times less than the US$32.9 billion issued by 55 operators a year before. Last year Parsley Energy alone raised US$2.2 billion in the first half of the year while WPX Energy, RSP Permian and Centennial Resource Development issued an additional US$1.9 billion in sale of common and preferred stock.
Companies shifted gradually towards issuing debt as improving oil prices fuelled investors’ willingness to sponsor shale growth, especially in fourth quarter 2017. Lower default rates may allow companies to attract capital more than three times cheaper compared to 2016 (1.9% vs 6.4% five-year CDS spread). Even though there is no evidence of limited funding in the short cycle, there are concerns as to whether the US Federal Reserve will increase interest rates. We estimate that when including US shale operators outside our selection, the funding need may increase to US$20 billion for 2018.
The downside risk of companies not being able to roll over debt obligations and attract external financing would result in a Capex cut of US$10.7 billion versus the base case which would result in 1300 fewer completed wells. Companies have some flexibility for dividend payments and could have about US$30.5 billion on balance which they could use to meet their expected Capex. Additional downside risk could arise from high service cost inflation, basin infrastructure limitations, cost of debt increase and higher non-upstream deductions.
Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/31012018/rystad-energy-top-33-shale-oil-producers-need-extra-us83-billion-to-balance-2018-cash-flows-at-us60-wti/