Credit Ratings and Cash-Flow Analysis of Oil and Gas Companies: Competitive Disadvantage in Financing Costs for Smaller Companies in Tight Capital Markets

Abstract

Summary This article concisely presents the results of a cash-flow analysis and the impact of recent capital-market dynamics on the relative competitive position of bigger [oil majors, public/private-partnership (PPP) oils, and independents] and smaller (unconventionals, small caps, and juniors) oil and gas companies. Upstream energy companies now compete not only for preferred access to the best new hydrocarbon resources but also for credit from capital markets. Although credit ratings of individual companies themselves have mostly remained unaffected by the Great Recession (in 2008–2009), the cost of credit and spread tied to the ratings has climbed steeply for most of them. The annual cash-flow statements of 24 representative companies were analyzed over a 5-year performance period (2004–2008). The companies involved come from all traditional peer groups: juniors (five), small caps (three), unconventionals (three), independents (three), PPP oils (four) and majors (six). Oil companies generate cash from the following two main sources of funds: (1) net cash generated from operations and (2) net cash raised from financing activities. In-depth analysis of the cash-flow metrics for each market capitalization category revealed that the operational income of smaller oil and gas companies commonly is insufficient to fund new capital-expenditure (CAPEX) projects. Such companies must resort to external financing resources (debt and equity financing), as follows from this study. The competition for financial resources has heightened since the onset of the recession, and companies need to be entrepreneurial in their search for capital. The pattern that emerged provides a crisp explanation on what drives asset swaps and acquisitions in times of tight capital. This analysis provides useful insight for oil executives as to the range of options and possible outcomes of finance strategies.