Capital raised by oil and gas companies grew 7% to US$617.4 billion in 2019. Debt (loans and bonds) continues to account for a large portion (92%) of the capital raised, with companies more typically generating equity through internal cash flows. 2019 saw some of the largest financing deals ever, including Occidental’s US$47 billion of debt secured to fund its acquisition of Anadarko and Saudi Aramco’s US$29.4 billion IPO, reportedly the largest ever.
While the value of capital raised was at a five-year high, the volume of fundraisings (1,324) was down 10% annually, continuing the downward trend of recent years. Despite the positive aggregate capital activities, this highlights that conditions are much more challenging for some companies and in some segments of the oil and gas market.
Financial stress in the US upstream is growing, as evidenced by rising bankruptcies, defaults and asset write-downs. Forty-six oil and gas companies in the US filed for bankruptcy in 2019, up from 31 in 2018. More bankruptcies may follow as companies face mounting debt maturities. According to Moody’s Investors Service, oil and gas companies in North America have more than US$200 billion of debt maturing over the coming four years, with more than US$40 billion expected to mature in 2020.
Similarly, low profitability and high debt continue to constrain the capital of many oilfield services (OFS) companies. OFS players are moving away from building capacity to asset-light and technology-driven models to create more value and greater returns for shareholders.
The need for new capital is driving consolidation in the oil and gas industry, and alternative funding sources are gaining prominence. Private equity (PE) and infrastructure funds are becoming important sources of capital. Oil and gas producers are also exploring creative ways to raise capital, such as asset-backed securities related to wells or joint ventures, including farmouts and “DrillCo” transactions in which an investor funds drilling costs in exchange for a share in a lease or well.
Oil and gas companies are facing dual pressure from investors to deliver superior returns and future-proof their businesses amid the energy transition. Despite growing consensus on the need for urgent and bold steps to mitigate climate change, new technologies are not mature or scalable enough to immediately displace the oil and gas volumes that are consumed today.