The current debt levels of U.S. oilfield and drilling (OFS) companies is unsustainable over the long term. According to Moody's Investors Service, OFS companies need a "substantial improvement in cash flow."
"U.S. oilfield services and drilling companies' high debt levels will continue to constrain their credit quality in 2019 and beyond," said Sreedhar Kona, a Moody's senior analyst. "The largest firms are significantly better positioned to regain their credit strength next year than the smaller ones, though the threat of balance sheet restructuring will persist, particularly for the latter."
Smaller and less diversified OFS companies face the most risk, while larger firms such as Schlumberger and Halliburton stand to benefit the most from an OFS recovery. Over the past 10 years OFS credit quality as a sector weakened. The average debt to EBITDA ratio increased more than 4.5 times in 2017, states Moody's.
"A decade ago, earnings were growing more quickly than debt, but the reverse was true between 2008 and 2014, then in 2015-16 cash flow shrank by more than 30%, with a consequent tripling in leverage," concluded the release.
-Michael Miller, managing editor