Cash is king

If there was a common management philosophy from executives at US independent oil and gas producers from their quarterly earnings calls, it was this: Make sure you spend less than you make.

When crude prices were near $100/bl, US producers focused on boosting output, often with a heavy reliance on debt issuance. Now, with a prolonged weakness in oil, cash has become king as producers work to repay their debt and meet expenses. Taking more debt isn’t so much of an option any more as debt-to-capital ratios worsen across the board. 

Moody’s Investors Service has already issued a warning: A default-forecasting model estimates that oil and gas companies with B2 rating or below may see an increase in the default rate from 2.7pc currently to 7.4pc in the next year. A B2 rating is just two steps above default. As of 1 May, oil and gas comprised 15pc of all those rated B3 or lower — the largest for any industry across the US corporate sector and nearly double last year’s level of 8pc.

“If oil prices do not rebound as expected or prices move lower, then we expect further downward pressure on companies already on the list and additions from downgraded companies being added,” it said.

Indeed, reflecting the urgency, key Bakken producer Continental Resources is aiming to be cash flow neutral by mid-year at $60/bl WTI, while Occidental expects to be neutral by the fourth quarter, assuming $60/bl crude. EOG Resources may have already met that goal, while Whiting expects to get there by 2016.

A positive fall-out of the drive to control spending is a fall in breakeven costs, so steep that producers such as Occidental, Devon and Chesapeake have raised their output guidance while cutting capex and lowering rig counts.

Marathon Oil has pocketed savings of a 28pc, while Continental has captured a 15pc fall in drilling and completion costs in the first quarter, and expects them to fall by 20pc by the middle of the year.

Overall, breakeven costs have fallen by an average of $20/bl in a year to $60/bl, according to Goldman Sachs.