According to the US Energy Information Administration (EIA), cash from operations for major energy companies has flattened in line with flat crude oil prices, which have had the lowest price volatility in years.
Based on data compiled from quarterly reports, for the year ending 31 March 2014, cash from operations for 127 major oil and gas companies totaled US$ 568 billion, and major uses of cash totaled US$ 677 billion, a difference of almost US$ 110 billion. This shortfall was filled through a US$ 106 billion net increase in debt and US$ 73 billion from sale of assets, which increased the overall cash balance. The gap between cash from operations and major uses of cash has widened in recent years from a low US$ 18 billion in 2010 to US$ 100 billion to US$ 120 billion during the past three years.
Average cash from operations from 2012 through the first quarter of 2014 increased US$ 59 billion (12%) compared to its 2010 – 2011 average. At the same time, major uses of cash increased by US$ 136 billion, from an average of US$ 548 billion in 2010 – 2011 to US$ 684 billion in the 2012 – 2014 period. While capital expenditures accounted for most of the increase, cash spent on share repurchases increased US$ 39 billion on average. In fact, net share repurchases was a source of cash for the 2010 – 2011 average, changing to a net use of cash in mid-2011.
The EIA explains that in order to meet spending with relatively flat growth in cash from operations, companies increased their borrowing. When comparing the major sources of cash for the first quarter only, the net increase in debt has made up at least 20% of cash since 2012.
However, an increase in debt is not necessarily a negative indicator. Low borrowing rates have allowed companies to use outside sources of capital (debt) to meet their spending needs. Production in North America, where many of the reporting companies have major operations, has increased dramatically in recent years. Using debt to fuel growth is a typical strategy, generating more revenue to service future debt payments.
Adapted from a press release by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/29072014/major-energy-companies-increase-debt-1029/