U.S. oil firms closer to balancing capital investment with operating cash flow

Although crude oil price decline since 2014 has led to significant reductions in operating cash flow for U.S. oil companies, their immediate financial situations are improving.

The United States Energy Information Administration (EIA), which made this disclosure in a statement on Monday, said that as oil companies’ spending falls and crude oil prices increase, need for oil companies to find external sources of funding may decline.

It stated that first-quarter 2016 financial results from U.S. onshore producers reveal an improving balance between capital expenditure and operating cash flow.

According to the agency, although, operating cash flow was the lowest in any quarter in the past five years, larger reductions to capital expenditure brought these companies closest to self-finance.

It said that with crude oil prices such as the global benchmark Brent price averaging over $45 per barrel in the second quarter—a 34 per cent increase from first-quarter 2016—cash flow may improve and help offset declining revenue from lower production.

EIA stated: “The difference between operating cash flow and capital expenditure—known as free cash flow or the financing gap—represents whether a company can pay for its investment through its after-tax profits.

“Over the past five years, companies substantially increased investment spending to raise production. In 2012 and early 2013, operating cash flow was about half of capital expenditure, making external finance necessary to pay for investment in production growth.

“Operating cash flow has declined over the past year, but it nonetheless has covered an increasing share of capital expenditure as companies are reducing their investment budgets more quickly. Smaller investment budgets are lowering the amount of cash U.S. onshore oil producers need to raise through outside sources”.

EIA said that capital expenditure decreases, however, might lead to further declines in production for U.S. oil producers. “First-quarter 2016 was the first year-over-year decline in crude oil and other liquids production for these companies in the past five years, driven by declines from existing fields and a lack of new well drilling. Falling production would likely reduce revenue and cash flow absent an increase in crude oil prices.