Paying down debt moves value to shareholders one quarter at a time

A producer that uses its cash flow to repay debt is doing something unglamorous and effective. The value of the whole business is split between lenders and shareholders, and every repayment moves a little more of it to the shareholders.

Deleveraging as a return

With the business worth the same, less debt means more equity. That happens without the oil price rising and without any growth in production. It also lowers interest costs, which frees more cash for the next repayment.

Once leverage reaches a comfortable level, the same cash can go to buybacks and dividends instead, and the shares are usually re-rated as the balance sheet stops being a question.

What I'm watching

• Net debt against the company's own target
• Interest expense, which should fall as debt does
• Breakeven oil prices, which show how much cash is available at lower prices

Where I stand

Long, on a balance sheet repair that adds to equity value quarter by quarter. It is a return that does not need a view on the oil price.

What would change my mind

A large acquisition funded with new debt. That would reset the clock on deleveraging, and the value moving to shareholders would move back to lenders.