Cash from operations to service debt
With large reductions in cash from operations and heavy burdens of fixed debt repayments, the ratio of debt servicing to operating cash flow rose in 2015. An EIA (Energy Information Agency) analysis shows that 83% of cash generated from operations is devoted to repaying debts. This is the highest percentage in thirteen quarters.
Profitability fell to zero
The trend of snatching cash from operations to service debt was on the rise from the fourth quarter of 2014—when the oil (USO) price drop began—and reached its highest point in 2Q15.
The difference between capital expenditure and cash flow from operations was almost zero in the second quarter of 2015. Comparing the year-over-year trend, energy companies (XLE) have a wide deficit in capital expenditure and cash flow from operations. As a result, companies could restructure their debts, issue fresh equity, and sell assets to fund this deficit. Now, even though companies refinanced debt and increased share issuances, fixed debt repayments continued to grab a major portion of cash flow from operations.
As a result of the above, financial leverage increased in these last few quarters as energy players borrowed more to continue operations. A higher financial leverage means more outgo of cash for interest payments. This hampers a company’s profit per share. According to data compiled by Bloomberg, as of May 2015, US E&P[1. Exploration and production] (XOP) companies had $127 billion outstanding of high-yield bond debt.
Some small E&Ps bankrupt
Samson Resources filed for Chapter 11 bankruptcy in September 2015, seeking to get rid of more than $3.25 billion in debt from its balance sheet. In August, rig operator Hercules Offshore (HERO) filed for bankruptcy and entered into a debt-equity swap worth a billion dollars. Small energy companies are more vulnerable to commodity price drops, but integrated oil majors like ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) managed to stay strong due to their downstream operations and robust balance sheets.