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.
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.