US Independents: cash is king in “stay flat” mode

Understanding reinvestment rates, deleveraging and free cash flow outcomes

With higher oil prices and increased capital discipline, US Independents are poised for a cash flow windfall that should deliver value to shareholders while allowing them to deleverage their current positions and even move forward with operational emissions mitigation.

We used a “stay flat” framework of flat production in the Lower 48 through 2025 and a 25% gearing ratio to understand reinvestment rates, deleveraging and free cash flow outcomes among the 23 US Independents we modelled between US$40 to $80 per barrel (bbl) WTI. At what price is growth possible while still serving shareholders and investors? We’ll examine each of the three factors.

Reinvestment rates

Market and shareholder pressure to constrain reinvestment rates to 70% or below has forced US Independents to place capital discipline at the core of their near-term strategies. As we covered in our previous article, our latest analysis shows that the US tight oil sector is still capable of modest growth at 70%, given WTI stays at approximately US$70/bbl.

The 23 US Independents modelled in our Lens Lower 48 Valuations platform showed that production would remain flat US$60/bbl with a 50% reinvestment rate of operating cash flow, with most continuing to show flat output at 60% reinvestment, signaling that the “new era of E&P” is operating with a new, lower paradigm.


When the Covid-19 pandemic disrupted markets worldwide, US Independents were already in a downturn—overleveraged with weak balance sheets. Excluding elite large caps such as ConocoPhillips, EOG, and Pioneer, the group started the year at a more than 50% gearing ratio in aggregate. With WTI hovering around US$70/bbl, we project they’ll reach approximately 30% by year’s end and 27% by the end of 2022, accelerating deleveraging by one to two years for most of the companies modelled.

Free cash flow

The next upcycle will see significant free cash generation as a result of continued discipline and higher oil prices. In Q4 2020, our discussions were centered on whether US Independents could stay flat and within cash flow at less than US$50/bbl. A year later at US$70/bbl, we’ve seen impressive incremental cash flow growth.

We expect the group of 23 companies we cover to generate approximately US$13 billion of incremental cash flow per year for every US$10/bbl increase in WTI. If WTI remains at US$70/bbl, with assumptions of a 25% gearing ratio and flat production, we can expect as much as US$180 billion in “discretionary” (post deleveraging) free cash flow in aggregate.

With mounting pressure to curb carbon emissions, this free cash flow windfall will also enable companies to start accelerating decarbonization efforts that their stakeholders are demanding as the energy transition continues to gather steam.

This insight was powered by Lens Lower 48 Valuations.

With Lens, our analysts are able to quickly screen and evaluate investment opportunities in the Lower 48 using integrated well, land, and company data in a single tool. Model the entire region under different oil price scenarios and reinvestment rates, or use it to evaluate acreage, multi-region companies and specific assets.

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