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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
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.
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
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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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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