E&P capital discipline gets painted with a broad brush. Tight controls on spending, returning cash flow to shareholders and share buybacks make up the glossy top coat on a much more complex picture.
Tucked among all that fiscal restraint, however, has been upstream oil and gas companies’ rush to burn its debt, or at least get rid of and refinance it as quickly as possible.
Debt, which took down so many E&Ps before and during the pandemic, is now a dirty word in the upstream space. No one wants it. So while E&Ps returned more cash to shareholders in 2021, they paid 1.7x more toward debt reduction than they distributed in cash to shareholders, according to Fitch Ratings.
While moderate capex increases are likely, shareholders and debt will come first, Fitch Ratings said in a March 14 report by analyst Mark Sadeghian.
“Significantly higher energy prices and operating cash flow will likely lead to leverage metrics that are below 2.0x and in some cases less than 1.0x for some issuers in 2022,” Sadeghian said. “E&P credit profiles have already improved since 2020 with debt reduction, refinancing activity, disciplined capex and improved FCF [free cash flow] generation. The effect of higher oil prices … will largely depend on capital allocation decisions and how much of the resultant cash companies will use for further capex versus distributions.”
Debt Forecast: Net Debt/EBITDAX
Company
2022E Leverage
2023E Leverage
APA Corp.
0.9x
0.6x
Coterra Energy Inc.
-0.6x
-1.2x
Devon Energy Corp.
-0.1x
-0.8x
Ovintiv Inc.
0.6x
0.0x
Hess Corp.
1.1x
0.9x
Occidental Petroleum Corp.
1.1x
0.8x
Diamondback Energy Inc.
0.5x
0.1x
Pioneer Natural Resources Co.
0.4x
-0.9x
Centennial Resource Dev.
0.5x
0.0x
Callon Petroleum Co.
1.8x
1.6x
Matador Resources Co.
0.4x
-0.1x
SM Energy Co.
0.5x
-0.1x
Continental Resources Inc.
0.6x
0.2x
Whiting Petroleum Corp.
-0.7x
-1.3x
PDC Energy Inc.
-0.2x
-0.6x
Antero Resources Corp.
0.3x
-0.3x
EQT Corp.
1.4x
0.5x
Range Resources Corp.
0.8x
0.3x
That compares with Fitch’s 2021 outlook, at a time in which most E&Ps with investment grade credit were able to access public debt markets, but only a handful of upstream companies with B credit ratings were able to access the senior unsecured bond market following the pandemic.
A cursory glance at nearly three dozen E&Ps also shows 2021 turned into a year of massive debt refinancing. Among 32 E&P companies that issued debt last year, a review by Hart Energy found that they refinanced more than $22.2 billion.
Management teams have also set debt thresholds that would have baffled their spendthrift predecessors. Continental Resources Inc., for instance, is on track to meet its leverage target of less than 1.0x debt/EBITDAX in 2022, despite its $3.25 billion purchase of Delaware Basin assets from Pioneer Natural Resources Co.
Devon Energy Corp.’s capital program includes a $1 billion buyback, a variable dividend and a target of retiring $1 billion debt in 2022 and 2023, said David Deckelbaum, an analyst for Cowen.
Hess Corp. plans to pursue a $500 million debt reduction. Even Occidental Petroleum Corp. incurred the wrath of some investors when it purchased Anadarko Petroleum Corp. In May, the Wall Street Journal reported that Occidental was climbing out of its “Anadarko hole.”
“We would anticipate a focus on capital return as Oxy [Occidental Petroleum] has previously reiterated a $25 billion debt target before any decisions on capital return would be made, and we forecast the company hitting that level of net debt in 1Q22 and approaching ~1.0x leverage by year end at our current price deck,” Deckelbaum said.
Other companies are on track to be debt-free in the not too distant future.
Antero Resources Corp. (AR) is likely to target up to $700 million in debt reduction in addition to share buybacks. “We project AR to generate $1.4 billion of FCF in 2022 and with debt paydown to have just $1.6 billion of total debt. By the end of 2Q23, we project AR to be net debt free,” Deckelbaum said.
Fitch Ratings noted that strategic M&A will continue to be popular with companies as cash flows remain flexible and equity prices rise. But companies “generally remain averse to credit-dilutive M&A, preferring lower leverage levels and healthier balance sheets,” Sadeghian said.
Goldman Sach’s survey also continued to see debt reduction playing a major role in company plans for 2022, according to a March 14 report by analyst Neil Mehta.
Ovintiv Inc. is on track to achieve a $3 billion net debt target at the end of the second quarter based on above-strip prices and will turn additional free cash flow to debt reduction and small bolt-on acquisitions.
“We believe the focus for the company, aside from achieving its net debt target, will be on its ability to offset inflationary pressures through operational efficiencies,” Mehta said.
EQT Corp. is targeting a $1.5 billion debt reduction target by the end of 2023 and most recently tendered $206 million of its 3% notes of $568 million, according to Cowen. Goldman Sachs expects the company to improve its leverage from 2.3x in 2021 to 1.1x by 2023.
Companies such as Murphy Oil Corp. are prioritizing net debt, with the company’s goal to reduce debt to $1.4 billion and “remain on track to achieve its net debt target by 2H22,” Mehta said.
Gassier companies such as Southwestern Energy Co. have also reiterated plans to reduce net debt to EBITDA by 1.0x to 1.5x.
Selected Upstream Oil and Gas Refinancings, 2021
Company
Borrowings ($MM)
Maturity Date
Proceeds Use
Pioneer Natural Resources Co.
$2,500
2024/2026/2031
Refinance certain senior notes issued by Parsley Energy LLC and certain of its subsidiaries.
Diamondback Energy Inc.
$2,200
2052
Repay 2025 notes and outstanding QEP Resources notes due 2022, 2023 and 2026.
Tullow Oil Plc
$1,800
2026
Repay all amounts outstanding and cancel all commitments made to existing RBL facility; redeem in full senior notes due 2022; cancel convertible bonds due 2021.
Cenovus Energy Inc.
$1,250
2032
Partially finance the repurchase of some outstanding senior notes.
Southwestern Energy Co.
$1,200
2030
Fund previously announced tender offers and repay borrowings under its credit agreement.
Southwestern Energy Co.
$1,150
2032
Pay a portion of the outstanding balance of its revolving credit agreement.
Comstock Resources Inc.
$1,000
2029
Fund concurrent tender offers for a portion of its 2025 and 2026 notes; repayment of borrowings under its bank credit facility.
TechnipFMC Plc
$1,000
2026
Repay and terminate certain existing indebtedness related to the spinoff of Technip Energies.
Comstock Resources
$965
2030
Redeem 2026 notes, including the payment of all premiums, accrued interest and related fees and expenses incurred in connection therewith.
Vine Energy Inc. (acquired by Chesapeake)
$950
2029
Redeem all outstanding 8.75% and 9.75% notes due 2023 issued by Vine Energy Holdings LLC.
Indigo Natural Resources LLC
$700
2029
Redemption of all of its outstanding 2026 notes.
Callon Petroleum Co.
$650
2028
Fully redeem all 2023 notes and partially repay amounts outstanding under its senior secure.
Antero Resources Corp.
$600
2030
Fund redemption of 5.625% senior notes due 2023 at par plus accrued interest.
California Resources Corp.
$600
2026
Repay in full its second lien term loan and repay all outstanding 2027 senior secured notes.
Murphy Oil Corp.
$550
2028
Redeem outstanding 2022 notes.
Northern Oil and Gas Inc.
$550
2028
Repay revolving credit facility, repurchase or redeem all of its outstanding 2023 second lien notes, repay in full its outstanding 2020 unsecured promissory note.
Range Resources Corp.
$500
2029
Repayment of borrowings under its bank credit facility.
Kosmos Energy Ltd.
$450
2028
Repay outstanding indebtedness under its revolving credit facility and commercial debt facilities.
Kosmos Energy Ltd.
$400
2027
Refinance $400 million aggregate principal amount of private placement notes the company issued to fund its acquisition of Anadarko WCTP Co.
Ranger Oil Corp. (f/k/a Penn Virgnia Corp.)
$400
2026
Repay and discharge the long-term debt of Lonestar, following completion of its acquisition by Penn Virginia.
Laredo Petroleum Inc.
$400
2029
Repaying borrowings outstanding under its senior secured credit facility. SM Energy Co. 400 2028 Fund a cash tender offer for all of outstanding 6.125% senior notes due 2022.
SM Energy Co.
$400
2028
Fund a cash tender offer for all of outstanding 6.125% senior notes due 2022 and a portion of outstanding 5% senior notes due 2024.
Battalion Oil Corp.
$235
2052
Repay all outstanding loans and obligations under the company’s previous senior revolving credit facility.
W&T Offshore Inc.
$215
2028
Repay $48 million outstanding balance on its reserve-based lending facility and commodity hedging contracts.
SilverBow Resources Inc.
$200
2026
Extends maturity date to December 2026 subject to paying down $50 million on second lien facility.
Northern Oil and Gas Inc.
$200
2028
Repay a portion of the outstanding borrowings under its revolving credit facility.
Colgate Operating LLC
$200
2029
Fully repay amounts outstanding under its revolving credit facility.
Centennial Resource Development Inc.
$170
2028
Redeem at par the $127.1 million 8% second lien senior secured notes due 2025; repay borrowings.
Talos Energy Inc.
$100
2026
Repay a portion of the outstanding borrowings under its reserves-based lending facility.
