U.S. CHALLENGING TIMES
Results from second-quarter 2015 financial statements from 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. To adjust to lower cash flows, companies have turned to capital markets financing and also have reduced capital expenditures. With energy company bond yields widening in relation to U.S. Treasury bonds, some companies may have to reduce capital expenditures further to service their debt.
The 44 companies analyzed contributed much of the growth in global oil production over the past several years. Most of their operations are focused in onshore shale plays in the United States. According to the financial statements, their combined production averaged 2.7 million barrels per day over the first half of 2015, representing approximately 35% of U.S. Lower 48 production.
With U.S. crude oil prices 47% lower in first-half 2015 compared to first-half 2014, U.S. onshore companies experienced a significant reduction in cash flow from operations. Most companies responded by reducing capital expenditures. Even before the decline in prices, these companies had typically used a combination of debt, new equity, and cash flows to finance their rapid expansion, which is a common strategy for growing companies that need to finance investment before operating cash flow can increase. The difference between operating cash flow and capital expenditure—known as free cash flow—remained at a deficit in first-half 2015, although it was $2.8 billion higher than the same period in 2014 (Figure 1) and the second quarter was the lowest deficit for any quarter since 2012.
In addition to reducing capital expenditures, this group of companies responded to the reduction in cash flow in the first half of 2015 through share and debt issuance. 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, though, as interest rates for energy company debt issuance increased as crude oil prices declined, and are higher than for any other business sector.
Some actions from the companies' operating activities also helped mitigate the price decline. Net hedging assets stood at $8.8 billion in total for these companies as of June 30, 2015, the third-highest for any period since 2011. An oil-producing company can hedge by selling a portion of its future expected production in futures, options, or swaps markets, which locks in a price. These derivative instruments increase in value as prices fall and could provide a cushion to lower revenue from falling prices. These companies have also benefited from lower operating expenses, such as lower rates for drilling and support activities.
Because of the large stock of debt accumulated from past years, a higher percentage of operating cash flow is being devoted to debt-service payments (Figure 2). 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. 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 in recent quarters, with 83 cents of every dollar of operating cash being devoted to debt repayments for the four quarters ending June 30, 2015, the highest since at least 2011. As the debt repayment to operating cash flow share 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.
U.S. retail gasoline prices decrease, diesel fuel prices increase
The U.S. average retail price for regular gasoline decreased seven cents from last week to $2.44 per gallon as of September 7, 2015, $1.02 per gallon lower than at the same time last year. The Midwest price fell 12 cents to $2.35 per gallon. The West Coast price was down seven cents to $3.09 per gallon, and the Gulf Coast price declined six cents to $2.14 per gallon. The East Coast and Rocky Mountain prices each decreased four cents, to $2.31 per gallon and $2.73 per gallon, respectively.
The U.S. average diesel fuel price increased two cents from the previous week to $2.53 per gallon, down $1.28 from the same time last year. The Midwest price increased four cents to $2.48 per gallon, while the West Coast price increased two cents to $2.75 per gallon. The Rocky Mountain and Gulf Coast prices each increased one cent, to $2.57 per gallon and $2.39 per gallon, respectively. The East Coast price increased less than a penny to remain $2.59 per gallon.
Propane inventories gain
U.S. propane stocks increased by 0.2 million barrels last week to 96.6 million barrels as of September 4, 2015, 20.5 million barrels (27.0%) higher than a year ago. East Coast inventories increased by 0.7 million barrels while Gulf Coast and Rocky Mountain/West Coast inventories both increased by 0.2 million barrels. Midwest inventories decreased by 0.9 million barrels. Propylene non-fuel-use inventories represented 4.5% of total propane inventories.
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