The Cash Flow King
Oil and gas prices are rising, but the energy sector remains volatile. To pinpoint the safest and most promising energy stocks, look for healthy cash flow. Below, I examine the cash flow king.
The Wall Street Journal recently reported that only five of the Top 20 U.S. oil companies focused mostly on hydraulic fracking generated more cash than they spent in the first quarter of this year.
The article didn’t list the cash flow picture for the entire Top 20, nor did it explain how it calculated cash flow. But based on the numbers they reported and my own analysis, it appears they looked at the amount of cash generated from operations minus capital expenditures.
The story identified Continental Resources (NYSE: CLR) as the fracker with the greatest cash flow in Q1:
“Continental Resources Inc., which is primarily active in shale formations in North Dakota and Oklahoma, didn’t hedge its oil production for 2018. It raked in almost $258 million in cash after expenses in the first quarter, best among its peers.”
Continental infamously ditched its hedges as oil prices declined in 2014, expecting them to bounce back quickly. That proved to be a costly decision as oil prices continued to slide, but now that oil prices are on the rise Continental is reaping the benefits.
Since the article provided limited data on which companies generated positive cash flow, I reviewed the numbers myself for all U.S. and Canadian oil and gas producers, using data from the subscription-only S&P Global Market Intelligence database. I developed an Excel-based screening tool to analyze cash flow of the largest oil and gas companies, and I used it to replicate the WSJ calculation.
Presumably, the WSJ story didn’t include ConocoPhillips (NYSE: COP) in its analysis, because it led all oil companies in Q1 by far, with cash flow of $864 million for the quarter. Perhaps COP was omitted because the company isn’t purely a fracking play. COP is the largest pure oil and gas producer and its oil and gas operations are geographically diverse.
ConocoPhillips has undertaken significant belt-tightening since oil prices began to decline in 2014. The firm slashed its dividend, cut capital spending, and sold a number of assets. The result has been a steady improvement in the company’s cash flow.
Over the past year, ConocoPhillips is also first among all U.S. and Canadian pure oil and gas producers with $2.5 billion in cash flow. This works out to be $2.16 of cash flow per share. Continental Resources was again in 2nd place in this category, with $309 million of cash flow, which is $0.83/share.
COP shares have responded, rising more than 50% over the past 12 months. Capital IQ analysts rate COP “Outperform” on average, with consensus estimates for cash flow per share to rise by 53% in 2018 relative to last year.
Even though COP’s cash flow results are well above its peers, most oil companies are moving in the right direction. My screen included the Top 80 U.S. and Canadian oil and gas companies, and showed cumulative cash flow from the group at -$669 million for Q1 2018. A year ago, that number was -$6.9 billion.
But it remains to be seen whether producers can maintain spending discipline as oil prices rise.
P.S. While I’m on the topic, how’s YOUR cash flow? Does it leave something to be desired? My colleague Jim Fink, chief investment strategist of Options for Income, has devised a trading system that generates a big gain once a week, like clockwork.
It’s like getting an extra paycheck, week in and week out. In fact, the gain is so reliable that you can schedule it on your calendar. Imagine what you could do with that regular cash infusion. Take a nice vacation, buy a new car, or like one of the prudent oil companies I just mentioned, simply pay off debt!
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