US shale operators will in 2019 barely have cash to both service debt and pay out dividends.
Rystad Energy, the independent energy research and consulting firm headquartered in Norway with offices across the globe, has analyzed the 33 largest public shale operators in the United States, representing 39% of US shale production.
Indebted shale exploration and production companies (E&Ps) spent the second half of 2018 reducing their leverage ratios. Yet, many of them will barely generate enough free cash flow to cover debt service payments in 2019.
“Shale E&Ps struggle to please equity investors and reduce leverage ratios simultaneously. Despite a significant deleverage last year, estimated 2019 free cash flow barely covers operator obligations, putting E&Ps on thin ice as future dividend payments remain in question,” said Rystad Energy senior analyst Alisa Lukash.
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With interest rates hovering around zero percent since the financial crisis, the shale industry turned repeatedly to debt markets to finance its growth, which in turn made the US into the world’s largest producer of oil.
A Rystad Energy analysis of the companies’ debt maturity profiles shows that over half of their debt and interest payments are due within the next seven years. Our forecast is that dividend payments will be cut by almost $4 billion, with initial projections of $6.3 billion dwindling to a probable level of only about $2.3 billion.
“The obvious gap in expected versus likely dividend payments confirms the industry’s inability to deliver sustained investors’ payback while simultaneously deleveraging,” Lukash added.
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Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to the global energy industry. Our products and services cover energy fundamentals and the global and regional upstream, oilfield services and renewable energy industries, tailored to analysts, managers and executives alike. Rystad Energy’s headquarters are located in Oslo, Norway with offices in London, New York, Houston, Stavanger, Moscow, Rio de Janeiro, Singapore, Bangalore, Tokyo, Sydney and Dubai.