Oil exploration, production issue increasing amount of debt and equity
Publicly traded U.S. exploration and production (E&P) companies issued $4.4 billion in debt and equity in March 2021, the highest amount since August 2020.
According to an analysis by the Energy Information Administration, the amount of issued debt and equity has increased every month except one since last September.
EIA surmises that one of the reasons that U.S. E&P companies are issuing more debt and equity is to take advantage of increasing crude oil prices. Crude oil prices have been rising steadily since they hit multiyear lows in 2020. For example, Brent crude oil prices have gone from $40 per barrel in May 2020 to an average of around $65/barrel in March 2021.
In addition, low interest rates have lowered the cost of debt, which has likely also contributed to the recent growth in issuing debt and equity. The Federal Reserve System’s Federal Open Market Committee has held the federal funds rate at a target of 0 percent to 0.25 percent since March 2020.
Also, corporate bond yields have been low, contributing to lower interest rates on new bonds that companies issue, thus reducing the cost of issuing debt. For example, Moody’s seasoned AAA corporate bond yield averaged 2.70 percent in February, which is well below the average over the past decade of 3.78 percent.
As U.S. producers have increased access to debt and equity, EIA forecasts that U.S. crude oil production will increase from 10.7 million barrels per day in the first quarter of 2021 to 12.2 million barrels per day in the fourth quarter of 2022.
