Is This Trend a Killer for Oil and Gas?

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This article was written by Oilprice.com  -- the leading provider of energy news in the world.

Very interesting research released last week by the U.S. Energy Information Administration shows that the domestic E&P sector may be headed for some difficult times.

The Administration calculated the spending habits of oil and gas firms operating within the U.S., tallying both incoming operational cash flow and outgoing capital expenditures for these companies.


The results are surprising, revealing that today's oil and gas sector is spending well beyond its means.

Just look at the chart below. 2013 operational cash flow for the industry ran approximately $575 billion-while spending ("uses of cash") averaged just under $700 billion, meaning that firms spent over $100 billion more than they made from operations.

Source: EIA

Of course, these metrics don't tell the complete story when it comes to company financials.

E&P firms could, for example, make up the spending shortfall by selling assets and using the profits to shore up their bank accounts.

But the EIA research reveals that's not the way many companies have been doing things, with numerous firms instead making up the difference in spending through increased bank borrowing.

That means debt loads are growing across the industry, which sets up some interesting dynamics for the sector going forward.

A lot is now riding on the future performance of U.S. fields. Today's E&P spenders are basically betting that increased capital outlays will pay for themselves through rising production and profits down the road.

But the EIA numbers make this proposition look somewhat dubious. As the chart clearly shows, operational cash flows have been largely flat-lined for the last two years, with increased spending no longer giving the financials a lift.

That's a very worrisome trend, which could see today's big spenders left with high and perhaps even unserviceable debt loads as oil and gas fields "run on the treadmill."

This may be where the quality managers in the shale patch start to separate themselves from the pack.

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The article Is This Trend a Killer for Oil and Gas? originally appeared on Fool.com.

Written by Dave Forest at Oilprice.com

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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