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The U.S. energy boom has been bought on credit

  • The U.S. energy boom is undeniable - just today, the government said the U.S. next year will import only 23% of the crude oil it needs, the lowest since 1970 - but it's worth noting that the boom has been bought on credit.
  • Many oil companies that lead the way in the fracking revolution spend more cash leasing land and drilling than they make selling oil and gas; Standard & Poor’s says 75 of the 97 E&P companies it covers have junk bond ratings.
  • Little wonder that EOG - which generated $2.27B from its operations and spent $1.9B in Q1, its fourth straight cash flow-positive quarter - has one of the highest credit ratings (A-) of any oil and gas driller.
  • Heard On The Street's Liam Denning thinks E&P investors now may be just chasing momentum, leaving them vulnerable to sharp corrections.
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Comments (4)
  • Ajayyy
    , contributor
    Comments (310) | Send Message
     
    Why is anyone surprised that the growth in this industry is driven by credit. Isn't that true for every industry?

     

    Were these companies expected to create these huge capital intensive operations out of thin air? Of course they used credit and lots of debt.

     

    What is important is that $100 oil means these producers are pretty much printing money. If prices stay this high for a couple of quarters, US E&P will start looking very cheap at today's prices. A lot of companies are hedging prices at close to $100. This will keep them profitable and growing for quite some while. To me, the risks seems worth the reward.
    6 May, 07:46 PM Reply Like
  • Oilberta
    , contributor
    Comments (41) | Send Message
     
    This is why EOG is such an amazing company. Their dept to cap is low, but what is more impressive is how quickly a well reaches pay out. I think I read a Bakken well pays out in less than a year, The Eagle Ford wells are even more prolific. But there are very few companies in such a good position as EOG
    7 May, 01:51 AM Reply Like
  • User 353732
    , contributor
    Comments (4785) | Send Message
     
    No rapid growth company or industry or country can achieve its success without debt. The issue is not debt; it is net worth.
    Investments that generate returns in excess of the cost of credit create wealth and accelerating net worth and investments that do not ,destroy wealth.
    The great majority of independents who have used and must continue to use debt are earning returns far in excess of the cost of credit or indeed their overall cost of capital.
    Of course investors are chasing momentum but it is momentum in reserves; production, revenues, and cash flow...the right kind of momentum
    7 May, 12:55 PM Reply Like
  • Pal_Hardin
    , contributor
    Comment (1) | Send Message
     
    There are many qualifiers to the headline of the article- Payout time depends on how the company controls production from its wells. It could be a year or several years depending on their operating strategy. Bottom line being, if NPV of the project is positive over the course of the project, it is more than compensating for the cost of debt and the company is creating value..
    9 May, 01:50 PM Reply Like
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