Oil Industry Flush with Cash Shows Reduced Appetite for Debt

In the last year, the oil industry witnessed a significant decline in profits compared to previous years, with a notable decrease across the board in oil and gas companies as prices dropped due to diminished concerns over supply security. Despite these lower profits, the industry maintained high levels of cash reserves, leading to a reduced need for borrowing.

Bloomberg recently reported a 6% decrease in loan demand from the oil and gas sector in the past year, following a 1% decrease the year before. This trend is remarkable given that, during the earlier period, oil and gas producers had accumulated substantial cash reserves amid global fears of potential shortages. The recent reduction in borrowing demand was even more significant given the simultaneous drop in profits.

The industry has seen its net debt to earnings ratio before interest, tax, depreciation, and amortization shrink dramatically from 2.4 in 2020 to 0.8 last year. Analysts predict this ratio could fall below zero by 2030, potentially positioning the oil and gas sector as an attractive investment due to its unique financial structure.

Despite these strong financial indicators, concerns arise regarding the industry’s compatibility with global energy transition goals. Major banks have been scaling back their engagements with oil and gas companies to align with environmental initiatives. However, the industry’s financial independence suggests it can sustain and even expand without reliance on these major financial institutions. This has been evidenced by smaller, regional U.S. banks increasing their lending to the sector by up to 70% between 2022 and 2023, even as larger banks reduced their exposure.

Critics, including climate activists, argue that the persistent demand for fossil fuels, which contradicts many existing forecasts, underscores potential flaws in these projections. The ongoing financial robustness of oil and gas companies highlights their ability to reduce dependency on borrowed capital, which some believe casts doubt on the effectiveness of strategies aimed at limiting fossil fuel consumption through financial channels.

This development poses challenges for banks that have withdrawn from the sector to support environmental goals, suggesting that their efforts may have limited impact on the industry’s operations. This scenario reflects a broader resilience in oil demand, emphasizing the difficulty of curbing it by merely restricting supply.

Former Shell CEO Ben van Beurden has previously articulated this point, noting that reducing supply—such as ceasing the sale of petrol and diesel—would not decrease global demand or carbon emissions significantly. Consumers would simply seek alternative suppliers.

The current financial autonomy of oil and gas producers allows them to plan production increases based on market demand without the need for external funding. This autonomy and resilience to external pressures underscore the industry’s capacity to operate independently, highlighting a market-driven approach to production that could continue to challenge environmental and banking strategies aimed at reducing fossil fuel reliance.