First Quarter Cash Flow Champs
Many different factors are important to evaluate when comparing oil and gas companies. Some of the most important relate to the cash that a company generates from its revenues. Operating cash flow, or cash from operations (CFO), refers to the difference in the revenues that were generated and the cost of generating those revenues, excluding capital expenditures. The primary difference between CFO and free cash flow (FCF) is that the latter includes the effect of capital costs.
It isn’t unusual to see a company generate strong CFO but negative FCF. That can happen, for example, if a company expects an especially good business climate in the future, and they make significant capital expenditures in the hope of reaping future benefits. If the company outspends current CFO on capital expenditures, then FCF may be negative — but that isn’t necessarily a problem.
In any case, it is important to look at both when evaluating companies. Cash flow provides companies the ability to expand, pay dividends, buy back shares, etc. Companies with higher relative cash flow should outperform peer companies over time.
Now that first quarter earnings are in, let’s take a look at the companies that generated the most cash flow in the quarter. For this exercise, I used the proprietary stock screen I developed for The Energy Strategist. This screening tool is Excel-based and extracts data from the subscription-only S&P Global Market Intelligence database. I developed this tool specifically for energy companies.
I screened for publicly traded energy companies around the world. The screen identified 2,269 companies in this category. These companies ranged in size from $350 billion ExxonMobil (NYSE: XOM) down to several dozen companies with a market cap hovering right around zero. The average market capitalization of all the companies in the screen was just over $2 billion.
If you had asked me to guess which company would top the list, I would have said ExxonMobil. But actually, it was in 3rd place, with CFO for the first quarter of $8.2 billion. The list was topped by PetroChina, with Q1 CFO of $10.6 billion. Royal Dutch Shell (NYSE: RDS-A) was in the 2nd spot with Q1 CFO of $9.5 billion.
ExxonMobil did top the list for FCF for the quarter, with $4.6 billion. It was followed (surprisingly to me) by Statoil ASA (NYSE: STO) at $4.4 billion and Royal Dutch Shell at $3.2 billion. PetroChina dropped all the way to 18th place for FCF (primarily a result of higher capital expenditures than most companies higher on the list).
Of course, larger companies should generate more cash flow, but that says nothing about their relative value. So I looked at the CFO generated relative to the enterprise value (EV) of the company. When I narrowed the focus to just North American oil and gas producers (and integrated companies), one name stood out.
For the quarter, Appalachian Basin natural gas producer EQT Corporation (NYSE: EQT) generated CFO equivalent to 3.3% of its EV. By comparison, ExxonMobil came in at 2.1% (which was also the average value of the Top 10). By this measure, EQT seems to be relatively undervalued given its strong CFO for the quarter.
CFO and FCF are but two important metrics to consider when evaluating companies. This week in The Energy Strategist I will further break down the performance of oil and gas companies based on Q1 to see who is performing, and who isn’t. Consider subscribing to access this analysis.