Can US Independents sustain the capital needed to survive the energy transition?

By Robert Polk, Principal Analyst and Tom Ellacott, Senior Vice President, Corporate Research

Over the past decade, US Independents and E&Ps fueled rapid growth with easy access to capital. But with investors either exiting the sector or demanding greater capital discipline and lower reinvestment rates, these producers need a long-term strategy that ensures enough outside capital to fight the headwinds of increasing environment, social, and governance (ESG) imperatives. Who will thrive and who will fold depends largely on how well they balance self-funding, consolidation, investment in decarbonisation, and free cash flow generation?

Generating free cash flow

Our base case for US Independents has 30 key producers generating US$688 billion in free cash flow from 2021 to 2030 with a 52% reinvestment rate at US$50/bbl Brent and US$2.75/mcf Henry Hub. This deleveraging could act as a windfall for self-funding operations, setting the stage for achieving more sustainable long-term production levels.

Healthy balance sheets and returning value to stakeholders through increased dividends are more likely to attract new investors that can help companies accelerate their ESG efforts.

Stronger decarbonisation targets

To meet increasing investor and shareholder demands on commitments to ESG and net zero emissions, US Independents can benefit from increased transparency. They need to show stakeholders and potential investors that they have a long-term strategic plan for decarbonisation, lower emissions, and more sustainable operations. With standards changing quickly, these companies will be judged on their interim progress.

Even if core business remains in fossil fuels, action toward net zero emissions targets is important to the players investing capital into these companies as the energy transition accelerates. Healthy finances will propel US Independents toward their targets much more easily as the market shifts from survival mode to an era focused on better sustainability and smaller carbon footprints.

Consolidation driving sector strength

The US Lower 48 landscape is shifting toward fewer, larger companies, affording greater flexibility with scale. When it acquired DoublePoint Energy, Pioneer Natural Resources described its strategy as one of “disciplined growth,” wherein they scaled back development on new acreage. This trend across the peer group of increasing free cash flow helps companies build credibility with creditors and equity investors.

Disciplined allocation of new proceeds

With the use of proceeds undergoing increased scrutiny, prudent allocation from US Independents shows good stewardship, helping rebuild the trust of wary investors expecting better discipline and self-funded core drilling and completion. A sharper focus on allocation and liability management has emerged in the sector as companies seek to boost their flexibility and resilience.

Business models that support self-funding limit the need for new equity capital, buying time to restore confidence from investors and attracting more capital by deploying their own capital.