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. This continues a trend that has been ongoing throughout the fracking boom.
Winners and Losers
The article doesn’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 are defining cash flow as simply the amount of cash generated from operations minus capital expenditures.
The story indicated that overall, companies spent $1.13 for every $1 they took in. It further noted that “Oasis Petroleum Inc. spent $3.27 for every $1 it made in cash, while Parsley Energy Inc. spent almost $2 for every $1 it made in cash.”
Hedging was blamed for the underwhelming cash flow. The article noted that many producers hedged oil prices at $50 to $55 a barrel, and were therefore unable to cash in on the rally in oil prices. Of course, that makes you wonder why a company would hedge at a price that they should have known would result in negative cash flow.
Continental Resources infamously ditched its hedges in 2014 after oil prices declined to $75/bbl. The company expected prices to bounce back quickly. Continental hasn’t yet resumed hedging but expects to do so at some point. Notably, Continental was reported to have the highest cash flow among its peers at $258 million for Q1. EOG Resources was also highlighted for generating a $110 million cash surplus for the quarter. Related: Higher Prices To Help Oil Companies Refinance $400B In Debt
The article doesn’t name the other companies that generated positive cash flow, but I screened the data from the S&P Global Market Intelligence database and calculated it myself. The numbers I calculated for Continental and EOG matched the numbers reported in the WSJ article, so I used the same calculation for the rest of the companies.
Presumably, the WSJ story didn’t include ConocoPhillips in its analysis, as it led all oil companies (considering just the pure oil and gas producers) with cash flow of $864 million for the quarter. COP is the largest pure oil and gas producer, and like Continental, they aren’t hedged. But their oil and gas operations are geographically diverse, and they aren’t purely a fracking play.
Other companies generating positive cash flow among the 20 largest oil and gas producers by enterprise value (excluding the supermajor integrated companies) were EQT at $172 million, Chesapeake at $148 million, Cabot Oil & Gas at $117 million, and Cimarex at $41 million. The biggest overall cash flow loser in the Top 20 was Pioneer Natural Resources, which outspent its cash flow by $264 million.
No Permian Winners
Notably, despite the surge of oil production in the Permian Basin, none of the companies that generated positive cash flow in Q1 operate either exclusively or mostly within the Permian Basin. Related: Is A Natural Gas Pipeline Between Alaska And China Realistic?
Continental operates primarily in two areas: The Bakken in North Dakota and the SCOOP/STACK in Oklahoma. EOG has operations scattered across the midcontinent, as well as some international production. ConocoPhillips has a diverse production portfolio. The others generating positive cash flow are primarily natural gas companies, or have a large chunk of production outside of the Permian.
The lack of cash flow among Permian producers can be partially attributed to logistical constraints in the Permian that won’t likely be relieved until 2019. But it’s also a function of companies investing heavily into the Permian in anticipation of future production.
To be clear, it isn’t necessarily a concern if a company occasionally has negative cash flow. Companies invest for the future, and if their outlook is for higher oil prices then they may invest significantly. But this increases the level of risk for these companies, as a prolonged oil price slump could financially strain the big spenders.
In conclusion, I will note that most oil companies are moving in the right direction, even if some aren’t doing so quickly enough. My screen of the Top 80 U.S. and Canadian oil and gas companies showed cumulative cash flow from the group at -$669 million for Q1 2018. A year ago, that number was -$6.9 billion.
By Robert Rapier
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