Is US Tight Oil a 'Ponzi Scheme'?

Abstract

As US oil and gas share prices languish, there is some nagging concern about the financial health of the industry. Despite turning the world’s largest importer of crude oil into a global exporter, questions linger about profitability and financial leverage – some skeptics have gone so far as to ask if the industry is a “Ponzi Scheme.” Moreover, as oil and gas prices continue their lower-for-longer (but volatile) trajectory, and investors clamor for ever-more cash – in the form of dividends and share repurchases – operators struggle to balance competing demands on cash.

We analyzed 35 publicly-traded, US and Canadian tight/shale oil and gas specialists over the six years since global oil prices collapsed and found the industry to be largely profitable (i.e., aggregate Net Income of $5 per oil-equivalent-barrel produced), despite relatively low oil and gas prices. Moreover, with aggregate operating cash flow of $19 per oil-equivalent-barrel (boe) produced the industry has matured sufficiently to self-finance its own growth. In fact, despite heavy investment in both production-growth and reserves-growth, total financial leverage is modest (1.6x EBITDA) and one-third of operators’ credit ratings are investment grade. And in a separate comparative analysis with conventional Independents, we found that US tight oil operators have demonstrated superior profitability, growth and reinvestment, and financial leverage. Across the North American onshore E&P industry, technology-led, operational continuous improvement is driving dramatic, sustainable gains in well-productivity and cost per boe.