Cash-flush Oil Industry Has Less Appetite For Debt

Last year, profits in the oil industry were noticeably lower than in the previous year. Pretty much everyone in oil and gas booked a decline in the bottom line as prices deflated amid falling concerns about supply security. Cash, however, remained high. And it appears this cash has allowed the industry to lower their demand for borrowing.

Demand for loans from the oil and gas industry fell by 6% last year, Bloomberg reported this week. This followed a 1% decline during the previous year-but in that previous year oil and gas producers raked the cash in as the world panicked there were going to be shortages. The 6% decline in demand for loans when profits were lower, too, was certainly more notable.

"The oil and gas industry has experienced a number of booms and busts over the past few decades, but for now, it appears to be flush with cash," Bloomberg Intelligence senior analyst Andrew John Stevenson said, as quoted by the publication.

Thanks to these developments, oil and gas producers' ratio of net debt to earnings before interest, tax, depreciation and amortization has dropped from 2.4 in 2020 to 0.8 last year, Stevenson also said, adding that by 2030, this ratio could dip below zero, which would make the industry quite unique-and quite appealing to investors.

According to Bloomberg, however, this strong performance from oil and gas producers is cause for worry because of the transition. Indeed, large banks have been reducing the amount of business they do with oil and gas companies in line with the transition drive but, it appears, the industry can survive-and grow-without the help of those particular big banks. Especially when other lenders and asset managers are still very much exposed to oil and gas.

It was Bloomberg again that in April reported that smaller, regional U.S. banks were stepping up their lending to oil and gas producers as big-ticket names shrunk their dealings with the industry. The report calculated that five regional U.S. lenders had raised the amount of money they'd lent to oil and gas by as much as 70% between 2022 and 2023, while big lenders curbed their own lending to hydrocarbon producers in the same period.

"Someone betting heavily that the demand for fossil fuels will keep on rising significantly is clearly taking a view that is at odds with existing forecasts," one climate activist from an organization called the Network for Greening the Financial System told Bloomberg at the time.

Yet the existing forecasts must have some inaccuracies if oil and gas producers are becoming increasingly financially independent, needing less in borrowed capital than before. There can be only one rational explanation for this trend, and it has to do with demand for these companies' products. This demand has remained amazingly resilient in the face of energy transition challengers, and it has grown at a pace that has allowed oil and gas drillers to reduce their demand for loans.

This is perhaps unpleasant news for the banks that hastened their exit from oil and gas in an effort to support the shift away from hydrocarbons because, it turns out, the effort has been wasted. It would be even more unpleasant news for all the organizations that convinced the banks to do that with the argument that curbing lending to oil and gas will keep more of these in the ground. Perhaps this is a good time to recall the words of former Shell chief executive Ben van Beurden, who gave an excellent example of oil demand resilience and the futility of trying to kill this demand by reducing the supply of the commodity.

"Imagine Shell decided to stop selling petrol and diesel today," van Beurden said in a LinkedIn post commenting on a court ruling that obliged Shell to reduce its emissions by a whopping 45% by 2030. "This would certainly cut Shell's carbon emissions. But it would not help the world one bit. Demand for fuel would not change. People would fill up their cars and delivery trucks at other service stations."

By the same token, if BNP Paribas, Barclays, HSBC, and ING stop funding oil and gas projects, the companies leading those projects would go to another bank or-and this is rightly more concerning for banks and climate activists alike-they would use their own cash because they have it.

Even more worryingly for those working to reduce the world's reliance on oil and gas, this cash will help producers increase their output in the coming years, responding to demand trends. There would be no banks to stop them. Basically, the oil and gas industry has become more difficult to influence from the outside, so its chief motivation for production plans is now demand. A free market if ever there was one.

By Irina Slav for Oilprice.com

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