Energy Companies Gear Up for Next Downturn with Strong Balance Sheets
The oil industry is known for its volatility, and energy companies often build strong balance sheets to withstand price swings.
In 2020, during the pandemic, oil prices plummeted, and energy companies had to draw on their balance sheets to stay afloat. However, today's high oil prices are strengthening energy company balance sheets, with debt-to-equity ratios at their lowest in years.
ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), two of the world's largest and most diversified energy companies, have seen their debt-to-equity ratios increase by roughly 70% in 2020. However, with current prices at lofty levels, these ratios are now below 0.2x, a strong number for any business.
Smaller pure-play drillers like Devon Energy (NYSE: DVN) and Diamondback Energy (NASDAQ: FANG) also have strong balance sheets, with debt-to-equity ratios below 0.3x. While these companies may use their extra cash to increase production or make acquisitions, they are likely to prioritize returning capital to shareholders.
The real takeaway is that energy companies like Exxon and Chevron will enter 2027 with the financial strength needed to survive the next energy downturn.