(Bloomberg) — Demand for loans from fossil fuel companies fell 6% year-over-year last year, following a 1% decline in 2022.
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From a climate perspective, this may seem like good news, as lower bank lending to oil, gas and coal companies is expected to ultimately translate into less investment and less production.
The reality, however, is that oil and gas companies don’t need a lot of loans because they generate a lot of money from their underlying businesses today, said Andrew John Stevenson, senior analyst at Bloomberg Intelligence. And this trend is expected to continue until the end of the decade, he added.
“The oil and gas industry has seen a number of booms and busts over the past few decades, but for now it appears flush with cash,” he said. The healthy balance sheets reflect the boost businesses received from rising oil prices, supported by robust demand and OPEC+ production cuts.
Read more: Chances of $100 oil rise as supply shocks upend market
The sector’s free cash flow is so strong that the group’s leverage ratio, which measures a company’s net debt relative to earnings before interest, tax, depreciation and amortization, fell to 0.8 in 2023 from 2 .4 in 2020, Stevenson said. The ratio will likely fall below zero by the end of the decade, he said.
Banks typically play a critical role in allowing oil and gas companies to finance their capital spending projects, but that is changing, Stevenson said. As a group, the oil and gas industry’s free cash flow to capital spending ratio fell from 0.4 in 2020 to 1 last year, and it is expected to approach 1.4 by 2030.
BI’s analysis shows that the oil and gas industry’s free cash flow-to-investment ratio is poised to increase.
In other words, the average oil and gas company is now producing more cash than it needs to fund capital spending through the end of the decade, Stevenson said. But for the environment, these trends are not helpful, he said.
Chevron Corp. and Saudi Aramco are among the companies that could “significantly increase” their oil and gas production through 2030 with “sufficient liquidity available to support these investments,” Stevenson said. This will allow fossil fuel companies to undermine “the banking sector’s efforts to keep fuel in the ground as part of its fight against climate,” he said.
Exxon Mobil Corp. and Chevron, which released results on Friday, both forecast that their production in the Permian Basin – the US region that already supplies more oil than Iraq – will increase by 10% this year.
The expected increase comes as reports from the International Energy Agency indicate that oil demand is expected to grow by about 1.3 million barrels per day this year to reach a record level.
BI estimates for the combined oil and gas production of 75 publicly traded companies
–With help from Kevin Crowley.
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