Despite recent improvements in oil prices, high levels of leverage for North American exploration and production firms will persist for the rest of the year “as cash flows remain mismatched to debt loads for most companies,” according to a recent report from Moody’s.
Findings from the report, entitled “Independent Exploration & Production—North America: No Relief in Sight for Stretched Balance Sheets in 2016,” include the following:
• Among the 35 E&P firms studied, the analyst projects that total production will decline 4% this year, following a 6% increase in 2015. However, 12 of the 35 companies will increase their production this year.
• Aggregate total debt for the group will decline 2-3% this year vs. levels in 2015 under Moody’s price scenarios for this study. These debt levels, however, will still remain high compared with those in 2011-13.
• Moody’s forecasts that earnings before interest, taxes, depreciation, and amortization (EBITDA) for the companies surveyed will decline 38% this year vs. 2015 levels under its lower-price scenario, and fall 22% under the higher-price case.
• Leverage among the E&P firms surveyed has more than quadrupled since 2011, and will continue to get worse this year under either price scenario, “despite myriad actions to raise cash and fortify balance sheets.”
“E&P companies have been seeking remedies to become more efficient in finding and replacing reserves, reducing costs, and preventing their leverage from creeping higher,” said RJ Cruz, vice-president, senior analyst.