Insights

U.S. oil and gas: Debt, smaller producers and scaling up at pace

| By Tom Young

A high volume of M&A deals within U.S. oil and gas plus a sustained need to deliver shareholder returns are heavily influencing the debt strategies of several domestic producers.

Among operators below 200,000 boe/d, debt has risen by $3.5 billion (23%) to $18.6 billion over the past year to Q1 2024, according to Evaluate Energy data. Among larger operators, total debt also increased by $7 billion (4%) despite ExxonMobil and Chevron cutting combined debt by $2.4 billion.

“Debt has been rising to help maintain funding for capital budgets, dividends and buybacks because earnings for smaller operators have fallen below highs of 2022,” said Lewis Foley, financial analyst at Evaluate Energy.

Cash used and sourced by U.S. oil and gas producers 2021 - Q1 2024

Some smaller operators have also used debt to grow at scale and become a more valuable proposition in a market where “corporate mergers are happening thick and fast,” added Foley.

SilverBow Resources is a great case-in-point. “Scale is definitely a criteria that investors are looking for,” said company CEO Sean Woolverton when assessing Q1 performance. “We were very disciplined in how we’ve grown to this scale — we primarily leveraged debt to do that.”

Last August, SilverBow acquired Chesapeake Energy’s oil and gas assets in South Texas for $700 million funded by cash from an existing credit facility. Having leveraged debt to grow in its core operating area, SilverBow was then subject to a $2.1 billion takeover bid by Crescent Energy in May.

Another trend is clear. Having taken on large amounts of debt in early 2023, some producers have begun to ratchet-up debt repayments, with a spike in net cash for debt repayments occurring in Q4 2023.

Cash used for debt repayments 2021 - Q1 2024 among U.S. oil and gas producers

Four companies stand out with over $1 billion in combined net Q4 debt repayments: Crescent Energy, Murphy Oil, Northern Oil & Gas, and Vital Energy.

Smaller-scale examples include HighPeak Energy, Ring Energy and SandRidge Energy.

HighPeak began to repay debt in Q4 having consistently added debt over the prior two years. “Now we feel like we’ve reached a high enough level that any potential buyer or merger partner could be happy with what we’ve done…we’re just going to maintain paying down the debt,” said HighPeak CEO Jack Hightower on the firm’s Q1 results.

Ring Energy has repaid $33 million in debt since closing its acquisition of Founders Oil & Gas in August last year. And SandRidge began reducing debt after closing an approx. $11.25 million deal last July in the Anadarko Basin. “The company’s strong cash position and no debt provide competitive leverage in evaluating M&A opportunities,” said CEO Grayson Pranin.

“While the volume of cash used for debt repayments fell in Q1 2024 following the spike in Q4, this is not a concern because maturity dates on the vast majority of debt remain some way off,” added Evaluate Energy’s Foley. “Only six per cent of total debt matures in the next 24 months for these smaller producers.”

Q2 results are just around the corner and Evaluate Energy’s corporate financial and operating data can help you break down the numbers and unlock insights to accelerate your analysis. Click here to learn more.

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