Cash Flow Within the Petroleum Industry
Authors: Chrisman Neil D. 
Published: December 2007

In considering the critical problem of cash flow within the petroleum industry, it is tempting to recite the background and recent trends in the industry, to draw conclusions and then suggest action plans which, if not implemented, would leave the industry and this country in an untenable position. I have resisted this temptation, for the most part, for several reasons. To discuss the problem in that amount of detail with such a group as this would appear to me to be playing an old record, even though that record is important enough to replay as often as possible. But since this is an industry group, it seemed that we would just end up crying on each other's shoulder without really moving ahead on the job of solving the problem. There are two things on which we might usefully spend some time today. The first is further consideration of the one element that could stop the slide of the industry in every respect and set the framework for rebuilding to the point where the industry was 15 years ago. That element is price. Now, price increases have certainly been covered over and over again by industry spokesmen, but I hope to look at the subject of prices from a perspective slightly different from some of the perspective slightly different from some of the things we have recently been hearing and reading. Since whatever the outcome of price movements may be and let us assume it will be a change that would favor the industry's economics that outcome will take some time to come and will take longer to create the climate that we all hope to achieve. This will lead me to the second subject we can examine today, and that is how the financial community might help bridge the interim period. In discussing the first, we need to review briefly the substantive points that summarize the industry. There is not a chief executive or financial officer of a major or medium-sized oil company today who has not at one time or another, formally or informally, expressed his views on the position of the industry and hoped to hit an audience who could either help formulate opinion or take action to help solve the problem. These presentations have been in the form problem. These presentations have been in the form of speeches, paid advertisements, prepared booklets or letters, and position papers directed to the government. The issues are the adequacy of domestic supplies of crude petroleum and natural gas and the adequacy of a supply of capital to develop those resources and bring them to the market. In the area of adequate future domestic supply, you are all familiar with the following facts:Exploratory wells drilled since 1956 have declined steadily.Why? - Adverse economics arising from controlled gas prices, federal jawboning on crude oil and products prices (lately de-facto controls), and substantial cost increases from inflation and rising tax burdens both at home and abroad.This has resulted in declining reserve-to-production ratios. Crude oil has dropped from 21 years' supply in 1960 to 12 years' supply in 1971; and natural gas has dropped from 13 years' to 9 years' over the same span.Projections to 1985 show an inability of other energy sources to make up in time the shortfall in our lagging oil and gas supplies, though it is conceded that the reserves are there at some cost and price.Projections to 1985 under present conditions indicate we well be an importer of about 50 percent of our crude oil requirements, a heavy importer of gas and a user of new and expensive synthetic gas.
In the area of adequate future capital to support the industry to 1985, these are the facts:Essentially lower rate of return on invested capital in the decade of the 60's as compared with that available in the 50's falling to 9.3 percent domestically in 1971;Capital spending increasing at faster rates than the growth of internally generated cash;Increasing debt equity ratios from 16 percent of total capital in 1961 to more than 30 percent in 1971 (and nearer to 40 percent if debt equivalents are counted);Taxes increasing at rates much faster than net income; andCeilings on crude and product prices, first by competitive industry pressures and later by governmental decree or political pressure.
Most analysts of the problem and spokesmen for the industry have reached the same conclusions that the answers in an important part will come from the role of the government and the impact of its future actions.
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