Oil and gas activities are very capital intensive, but most oil and gas companies have relatively small debts, at least as a percentage of total financing. This is reflected in debt-to-equity, or D / E, ratios that are between 0. 3 and 0. 5, although that figure has risen since the financial crisis of 2007-2008. Keep in mind that not all oil companies are involved in the same activities. The position of a company along the supply chain influences the D / E ratio.
The ratio of debts to shares
Calculate the D / E ratio of a company by dividing total equity by total liabilities. Publicly traded companies have this information available in their annual accounts. The D / E ratio reflects the extent to which a company has a leverage effect. In other words, it shows how many of the company’s financing results come from debt, as opposed to shares. In general, higher ratios are worse than lower ratios; Higher ratios can be acceptable to large companies or certain industries.
Trends in the oil and gas industry
Many oil companies have reduced their D / E ratios during the mid-2000s due to the rising oil prices. Higher profit margins enabled companies to pay off debts and to rely less heavily on debts for future financing. From 2008-2009 oil prices fell dramatically. There were three main reasons: fracking allowed companies to reach new oil reserves in an economic way; oil and gas shale production exploded, particularly in North America; and a global recession has put downward pressure on commodity prices.
Profit margins and cash flow decreased for many oil and gas producers. Many turned to debt financing as a stop-gap; the idea was to let production flow through low interest debt until prices recovered. This in turn increased the D / E ratios in the entire industry. Before the 2008 financial crisis, the common D / E ratios between oil and gas companies fell in the range of 0. 2 to 0. 6. From 2014, the range fluctuated within 0. 4 and 0. 8.