A “tremendous overspend” persists among US shale oil producers, according to new research by Rystad Energy.
The Norway-based consultancy says that just 4 out of 40 dedicated US shale oil companies it studied reported a positive cash flow balance in Q1/2019.
The group’s cash flow fro operating activities — the cash that is available to expand the business, reduce debt, or return to shareholders — dropped from US$14 billion in Q4/2018 to US$9.9 billion in Q1/2019.
“That is the lowest cash flow from operations we have seen since the fourth quarter of 2017,” Rystad senior analyst Alisa Lukash said in a statement.
“The gap between capex and CFO has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017.”
With negative cash flows, shale companies have historically relied on bond markets to finance their operations. Without additional funding and any debt refinancing, capex would have to be cut, Rystad said.
However, no US shale company has made a public offering since the sharp fall in oil prices – and subsequent share price slide – late last year, marking the longest gap in public capital issuance since 2014.
Researchers said that March and April 2019 saw a few of the more indebted operators issue bonds, intended to partly cover outstanding obligations for the coming year. However, pricing for this type of issuance has risen substantially due to the increased Fed Rate and the overall increased risk associated with US oil companies from a market perspective.
“Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. “While shale operators continue to focus on improving capital efficiency, investors are putting the industry under extreme pressure, leaving no room for undisciplined spending in 2019.”
Many operators are building production momentum now after a seasonal dip during the winter months, Rystad said. The consultancy expects that as prices improve, the second quarter will see a significant increase in cash flow from operations while capex remains stable.