Capital raising by US oil exploration and production companies has fallen sharply following the decline in crude prices that began last October, pointing to cutbacks in capital spending budgets and a continuing slowdown in activity.
Companies in the sector have not held a single bond sale since the start of November, according to Dealogic, while share sales have also slowed. The data suggest that after a record-breaking boom in US oil output in 2018, growth will be weaker this year.
The government’s Energy Information Administration has forecast that between December 2018 and December 2019, US crude production will rise by about 500,000 barrels a day. That would represent a sharp slowdown from growth of 1.8m b/d over the previous 12 months.
The US shale industry has relied heavily on debt to finance its growth, with exploration and production companies raising about $300bn from bond issuance over the past 10 years.
As crude prices started to slide last October, that source of capital was choked off, with just three bond sales by exploration companies that month, and none at all since November, according to Dealogic.
US benchmark crude dropped from a peak of about $76 a barrel in early October to about $42 at Christmas, before recovering to about $53 this week.
Ken Monaghan, co-head of high yield at Amundi Pioneer, the fund management group, said the rise in exploration and production companies’ debt yields had put off potential borrowers, with spreads over US Treasury bonds climbing from 3.9 to 7.5 percentage points at their peak before settling back to about 5.9 percentage points this year.
“No one wanted to issue debt unless they had to,” Mr Monaghan said. “At the peak, they would have been looking at yields of about 10.25 per cent. That’s awfully expensive.”
Henry Peabody of Eaton Vance, another fund management group, said that for the time being debt and equity investors were aligned in encouraging oil producers to pursue cash generation rather than borrowing more to pursue growth. “No one wants to get caught out over their skis,” he said.
Speaking on a panel at the World Economic Forum in Davos on Wednesday, Vicki Hollub, Occidental Petroleum’s chief executive, said US shale oil companies were being forced to react to an investor push for more spending discipline. “Not as much money is going to be pouring into the Permian basin,” she said.
John Hess, chief executive of Hess Corporation who was also on the same panel, said shale producers were now contending with a new financial climate. “The investor paradigm is changing.”
Weak share prices have also been a deterrent to capital raising. Share issuance by exploration and production companies has slowed sharply, with just $157m raised from equity sales in the past four months as the S&P oil and gas exploration and production sector index has fallen 29 per cent since October. There has not been an initial public offering of an oil and gas company for more than a year, and companies that were looking at possible flotations are expected to wait for markets to recover.
“We have a great IPO backlog, but not much IPO activity,” said Osmar Abib, co-head of energy at Credit Suisse. “We are getting ready, but owners are not going to go out at a substantial discount and give away value.”
With new capital constrained and cash flows squeezed by the weaker crude price, oil production companies are expected to rein in their plans for drilling and completing new wells. The number of rigs drilling oil wells in the US has already dropped by about 8 per cent since November to 889, according to S&P Global Platts Analytics.
Paal Kibsgaard, chief executive of oilfield services group Schlumberger, told analysts on a call last week that given a steady recovery in US crude prices to last year’s average of about $65 a barrel, it expected investment in onshore exploration and production in the US this year to be “flat to slightly down compared to 2018”.
The companies with the greatest access to capital are the big international oil groups, many of which have been building positions in shale oil and projecting steep production growth. Chevron said last month that about a quarter of its planned $20bn capital spending this year would go to the Permian Basin of Texas and New Mexico and other shale investments.
Merger and acquisition activity in the US exploration and production industry picked up sharply last year, with BP’s $10.5bn purchase of BHP’s shale assets the largest deal, and international oil companies could be buyers again this year, analysts and advisers say. Royal Dutch Shell has been reported to have been looking at buying privately held Endeavor Energy Resources, a leading holder of drilling rights in the Permian Basin.
Tim Perry, also of Credit Suisse, said he expected financial pressures to encourage further deals.
“Investors want bigger companies, so companies are looking for scale. Larger companies can get their development financed more efficiently,” he said. “There is a general recognition that the industry needs to consolidate.”
