US oil and gas industry's debt reduction has slowed to a stop

The downward trend in the amount of debt carried by US oil and gas companies has leveled off after two years of rapid declines, data from S&P Global Market Intelligence showed.

The companies in the S&P Oil & Gas Exploration and Production Select Industry Index slashed their debt from a high of $311 billion in 2020 to $178 billion at the end of 2022, according to the data. Since then, however, debt repayment has stalled, and the companies ended the third quarter of 2023 owing a combined $182 billion.

Thomas Watters, the lead US oil and gas credit analyst for S&P Global Ratings, said the industry is unlikely to add substantially more debt in 2024. But he expected US oil and gas companies to lean into shareholder rewards and away from debt reduction this year because most corporate bonds mature in the future.

"It has helped that commodity prices were strong over the last couple of years, allowing companies to pay down debt or build up cash," Watters said in a Jan. 25 email.

Investment-grade oil and gas companies will emphasize using free cash to reward shareholders in 2024, CreditSights energy analyst Charles Johnston said, while high-yield borrowers will keep paying down debt in a bid to reach investment grade.

"Upstream credit metrics may be near their peaks for certain issuers, but we expect sector-level metrics to continue to improve in 2024 as certain issuers continue to progress toward balance sheet goals," Johnston said in a preview of 2024.

Among investment-grade issuers, EOG Resources Inc. "is paying out the greatest fixed amount with 26% of its 2024 estimated EBITDA going to dividends, while [Occidental Petroleum Corp.] is on the low end, allocating 4% toward dividends," Johnston said.

Johnston said Appalachian shale gas drillers Antero Resources Corp. and Range Resources Corp. may shift to shareholder rewards this year as they approach their debt targets.

"Producers have cut capex and focused on generating free cash flow and pretty much did a 180 on the go-go days of 'drill baby drill' when they used to get rewarded in their share price by growing production," Watters said in his email. "Not anymore! It's all about focus on [free cash flow], paying down debt and returning value to shareholders."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.