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For Shale Oil, Cash Flow Ain't "Free"

At the close of 1Q2021, EOG had $5.094 B of long term debt and its interest on that debt is expected to grow to $235.4MM in 2021 (Macroaxis). Its Permian Basin counterpart, PXD, had $6,177 B of long term debt and paid $39MM of interest in the first quarter of 2021. (SEC 10Q's). Its interest on long term debt is expected to grow in 2021 to over $225MM.

"Net" debt is horse dookey. If you have cash on hand to reduce debt, and save interest expense... do it! Earning 1.25% and paying 4.25% is stupid. Nobody, I repeat nobody, in the oil business wants to be in debt, particularly when your assets decline 85% the first 30 months of production life. Peter Lynch famously said: "A company that does not have debt cannot go bankrupt."

Right, Floyd?

Both these poster children for the US shale oil sector added big time debt year on year but are now bragging about "free cash flow" for 1Q and for the rest of 2021. How, exactly, is any cash you earn "free" when you are $5-6 billion in debt?

Those two corporations, like most of the rest of the shale oil sector, will increase net revenue from operations in 2021 ...because they were told by stakeholders to STOP ! outspending revenue.

Product price increases help raise net revenue, raping service and suppliers to reduce costs helps, firing employees help, but there is no miracle of improved efficiency or technology underway here...the shale oil sector is simply reducing CAPEX by not drilling as many wells. It is being... obedient. When you are over your hard hat in debt you don't manage that debt, it manages you. Debt maturities, loan covenants, lenders, 1st, 2nd and 3rd lien holders, and shareholders own you. Like goats trapped in a pen. I mean, its not like you're free to do what you want with this "free" cash flow, is it?

What are the ramifications of this "time-out" to the shale oil business model, of slowing down the drilling hamster wheel to finally make some bucks and appease pissed off lenders?

Its a disaster. New shale oil needs to be coming in the front door as fast as the old stuff goes out the back door. Case in point: the annual base decline rate in HZ tight oil production from the Permian basin, YOY, is 2MM BOPD ! If you intentionally slow down reserve replacement ratios to less than 100%; your income generating assets disappear and along with it, future cash flow. Pay now and pay again later.

In the shale oil biz, its all about the decline, baby:

For those that think a year of "free cash flow" is an indication of shale oil success, that a new dawn is breaking,'re missing the big picture.


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