Energy firms turn attention to cash flow
The oil business no longer is focused primarily on how much oil can be found, produced and moved to market.
Twenty months into the ongoing oil price downturn and eight years into a low natural gas market, companies are scrambling to cut costs and prove to Wall Street and their lenders that they will survive long enough to see commodity prices recover.
Production levels used to be among the first numbers included in quarterly earnings reports. Production remains important, but its prominence has been replaced by cash flow, liquidity and cost savings.
In recent weeks, energy companies have canceled or slashed dividend payments and drastically cut drilling budgets. Devon Energy Corp. this week cut its drilling budget by 75 percent, reduced its common stock dividend by 75 percent, laid off 1,000 employees and announced a stock offering expected to raise $1.3 billion.
“As we look to 2016, our top priority is to protect the balance sheet by balancing spending requirements with available cash flow,” Devon CEO Dave
Hager said in a conference call with analysts on Wednesday.
“We are committed to living within cash flows in 2016. To do so, we have taken aggressive methods to preserve more than $1 billion through operating costs and dividend reductions.”
Continental Resources Inc. executives made similar comments earlier this month when the company said it is cutting its drilling budget by 66 percent in 2016.
“Continental’s 2016 budget confirms our intense focus on cash flow neutrality,” CEO Harold Hamm said in a statement. “Strategically, we are dedicated to preserving the value of our premier assets and building operational efficiencies in preparation for crude oil prices to stabilize and start recovering later this year. Fortunately our lean organization and strong liquidity have us well-positioned to manage through this period until the recovery begins.”
Sand-Ridge Energy Inc. this month maxed out its credit limit and this week delayed a scheduled interest payment. The company also has laid off 440 employees since the first of the year.
“With a strong cash balance, we will continue operations without interruption, including paying employees, vendors and service providers,” CEO James Bennett said in a statement Wednesday. “Today’s actions will preserve liquidity and flexibility as we continue to engage in constructive dialogue with our stakeholders.”
Oil and natural gas companies historically have spent everything they had for drilling, often outspending cash flow and making up for the difference by issuing either new debt or equity. Not any more. “Cash is king in these trying times,” said Jake Dollarhide, president of Longbow Asset Management Co. in Tulsa. “They need access to liquidity to help them survive this difficult time and also to be able to be a viable entity when the upswing eventually occurs.”