January 2018

Top 33 shale oil producers need extra 8.3 BUSD to balance 2018 cash flows at 60 USD WTI

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A selection of the top 33 shale oil producers’ need USD 8.3 billion of additional funding on top of USD 2.4 billion debt refinancing in a 60 WTI price environment to meet a capex expectation of USD 58.4 billion. These companies represent 61% of US shale oil production in 2018 and were chosen for their focus on oil production.

Without the additional funding and any debt refinancing, capex would be cut to USD 47.7 billion which would bring down the amount of completed wells to 5,600 from 6,900 with external capital. Additional funding will go towards roughly 16% of 2018 production and USD 10.7 billion underspending will result in 275 thousand barrels per day volumes cut.

We estimate producers will have USD 67.2 billion in operating cash flow in 2018. Forty-two percent of hedged volumes are secured through swap contracts and have a ceiling of 52 USD/bbl, resulting in a USD 1.8 billion loss in a USD 60 WTI price environment. Seven companies – Concho Resources, Encana, Diamondback Energy, Devon Energy, Pioneer Natural Resources, QEP Resources, and WPX Energy – will incur the largest hedging losses. The selected 33 oil producers were able to secure 23% of 2018 production with an average floor price of 50 USD/bbl as of third quarter 2017. Operators are scheduled to pay USD 6.8 billion in interest expenses and USD 2.4 billion in maturing debt. Applying weighted average DPS over the last twelve months, we expect these operators to pay USD 6.2 billion in dividends. This leaves USD 50 billion for drilling prior to peer group adjustment for the cash positive operators. 

We expect Anadarko, ConocoPhillips and Marathon Oil to have positive cash flow balances amounting to USD 2.3 billion in 2018. Unless these companies acquire the acreage of cash negative operators, the gap between capex and available funds without additional financing will come to USD 10.7 billion.

In 2017, 28 shale operators issued equity amounting to USD 7.3 billion which is four times less than the USD 32.9 billion issued by 55 operators a year before. Last year Parsley Energy alone raised USD 2.2 billion in the first half of the year while WPX Energy, RSP Permian and Centennial Resource Development issued an additional USD 1.9 billion in sale of common and preferred stock.

Companies shifted gradually towards issuing debt as improving oil prices fueled investors’ willingness to sponsor shale growth, especially in fourth quarter 2017. Lower default rates may allow companies to attract capital more than three times cheaper compared to 2016 (1.9% vs 6.4% five-year CDS spread). Even though there is no evidence of limited funding in the short cycle, there are concerns as to whether the US Federal Reserve will increase interest rates. We estimate that when including US shale operators outside our selection, the funding need may increase to USD 20 billion for 2018.

The downside risk of companies not being able to roll over debt obligations and attract external financing would result in a capex cut of USD 10.7 billion versus the base case which would result in 1,300 fewer completed wells. Companies have some flexibility for dividend payments and could have about USD 30.5 billion on balance which they could use to meet their expected capex. Additional downside risk could arise from high service cost inflation, basin infrastructure limitations, cost of debt increase and higher non-upstream deductions.