U.S firms to lower cash flows over falling oil prices

DOLLARISATIONLow oil prices have significantly reduced cash flow for U.S. oil producers, with companies reducing capital expenditures and raising more cash from debts and equities.

The United States Energy Information Administration (EIA), which made this disclosure yesterday in a statement, said that results from second-quarter 2015 financial statements from some
U.S. companies with onshore oil operations, suggest continued financial strains.

According to EIA, because of the large amount of debt accumulated from past years, a higher percentage of operating cash flow is being devoted to servicing debt.

It added that debt service payments consist of principal repayment to creditors and are typically are fixed in both amount and frequency, agreed upon before a company receives a bank loan or issued a bond.

EIA stated: “Some companies have been able to refinance their debt—that is, paying off old debt and taking on new debt, perhaps with a different interest rate or longer maturity. This option has increasingly become more expensive, because interest rates for energy company debt issuance have risen as crude oil prices declined, and rates are now higher than for any other business sector. “The spread for energy company bond yields with a credit rating below investment grade averaged 11 percentage points above the risk-free rate since August, indicating higher interest rates for energy companies”.

He added: “With fixed debt repayments and the large reduction in cash from operations for these companies, the ratio of debt repayments to operating cash flow has increased recently. For the previous four quarters from July 1, 2014 to June 30, 2015, 83 per cent of these companies’ operating cash was being devoted to debt repayments, the highest since at least 2012. As the share of debt repayment to operating cash flow increases, a company is left with less cash to use for investment opportunities, dividends, or savings for future use.

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