When oil prices plunged in 2014, many companies were caught off guard. Some were extremely leveraged and went bankrupt. All of them had to slash spending. And that leads to the second point that is frequently overlooked.
Oil companies aren’t all operated in the same way. Some operate recklessly and with excessive leverage, while others are much more conservative. That is reflected in the individual results of these companies.
Negative FCF, No Problem
Some companies go for years without generating positive FCF. Diamondback Energy, for example is one of the largest pure shale/tight oil producers. They went public in 2012, and have never generated positive FCF. But that hasn’t posed a problem, as their debt/EBITDA ratio is at a manageable 2.5.
Further, Diamondback shares have risen by 470% since the company’s 2012 initial public offering — nearly five times the return of the S&P 500. Thus, despite years of negative FCF, Diamondback’s stock market performance leaves most of its peers in the dust.
Also consider Anadarko, which Chevron and Occidental are aggressively competing to acquire. In the past ten years, they have only generated FCF three times. But the company is viewed as an extremely attractive asset.
The King of Cash Flow
Then there’s ConocoPhillips, which is active in the Eagle Ford, Bakken and Permian Basin. In recent years, COP has been the king of cash flow among the pure oil and gas producers.
In the past ten years, ConocoPhillips has generated positive FCF seven times. They took a hit like most other producers in 2015, but the company responded with significant belt-tightening. 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.