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

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.