Oil ended 2017 on a high note, as it closed above $60 a barrel, which was a 2 1/2 year high. That pricing level is worth noting since many oil producers were barely generating enough cash flow when crude was in the $50s to meet their needs. However, with oil now in the $60s, they'll produce more cash, which could help them get back on their feet more quickly. Here are three that would be among the greatest beneficiaries from $60 oil.
More options at $60 a barrel
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With oil at $50 a barrel, Baytex Energy (NYSE: BTE) generates just enough cash flow to drill the wells needed to maintain its production rate. However, the Canadian oil company noted that, if oil averaged $55 a barrel this year, it would generate about $60 million Canadian ($48 million) in free cash flow, which is enough money to drill the wells needed to boost its production rate 6% by the end of the year.
That said, with oil now over $60 a barrel, Baytex Energy could generate as much as CA$100 million ($80 million) in free cash flow this year. Baytex could use that excess cash to drill even more new wells and grow production at a faster pace, or it could use the money to chip away at its debt, which stood at CA$1.75 billion ($1.4 billion) at the end of the third quarter. That's optionality it doesn't have when oil is below $60 a barrel.
A quick improvement to the leverage ratio
California Resources (NYSE: CRC) has struggled to cope with lower oil prices over the past few years. In fact, the company hasn't been able to generate enough cash flow to finance the wells needed even to maintain its production rate, let alone grow output.
One reason is that a significant portion of its cash flow has been going toward supporting its massive debt load. California Resources has so much outstanding debt that at $55 oil, it's leverage ratio would be about 7 times this year, which is well above the 2 times to 3 times ratios of most other oil companies. However, with oil in the $60s, the corresponding increase in earnings would help push its leverage ratio closer to 5 times this year. While that's still elevated, it would mark a significant improvement.
More money to pay back borrowings
Denbury Resources (NYSE: DNR) has also been struggling to generate the cash needed to grow production and pay down debt. In fact, for much of last year, the company spent more than it brought in, which forced it to use its credit facility to bridge the gap. As a result, it borrowed $495 million of the $1.05 billion it had available by the end of September, up from $301 million to start the year.
However, Denbury noted that, if oil remained in the low-to-mid $50s for the remainder of the year, it could get that level down to $450 million to $475 million by year-end. Meanwhile, with crude now above $60 a barrel, Denbury could generate even more free cash flow in 2018, which could enable it to pay down that credit facility quickly.
Quickly shedding the weight
If oil can stick in the $60s this year, it would allow Denbury, California Resources, and Baytex Energy to generate a lot more cash flow, which could help them pay down their debt more quickly. This leverage reduction would reduce their interest expenses and free up even more cash flow that they could use to repay debt. That sets the stage for a potential rapid improvement in their financial situation this year, which could help shed the weight of debt that has pulled their stocks down more than 60% over the past few years.
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