uploads///Cash Flow Analysis of Upstream Companies

Upstream Companies Generated Lower Cash Flows in Fiscal 3Q15


Jan. 2 2016, Updated 5:06 p.m. ET

Cash flow analysis for upstream companies

In fiscal 3Q15, large-cap exploration and production companies generated less cash than they required. For example, the average ratio of cash that upstream companies generated versus the cash they required was 0.75x in fiscal 3Q15. Meanwhile, the average ratio of cash that large-cap downstream companies generated versus the cash they required was 1.06x in fiscal 3Q15.

In terms of specific companies, EOG Resources (EOG) managed to keep its ratios low at 1.01x. The upstream firms EQT (EQT) and Devon Energy (DVN) maintained ratios at even lower levels of 0.57x and 0.43x, respectively, in fiscal 3Q15.

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Complications in the industry

The upstream industry is capital intensive. Lower cash flows increase a company’s chance of being caught in a vicious cycle of debt raising and refinancing.

Depending on the company, there can be more complications. For example, EQT gets 64% of its revenue from its upstream business and 24% from its midstream business. Both of these segments are vulnerable to lower crude oil prices. However, upstream accounts for 56% of Devon Energy’s total revenue while downstream accounts for 44% of it.

Free cash flows per share for upstream companies

In fiscal 3Q15, the free cash flows per share for EOG Resources and Marathon Oil (MRO) were $0.74 and $0.48, respectively. Meanwhile, upstream companies Devon Energy and Apache (APA) had negative free cash flows per share of $18 and $10, respectively.

The above graph shows the ratios of cash generated to cash required for large-cap upstream companies in fiscal 3Q15. It also shows the companies’ free cash flows per share. Devon Energy and Apache have weights of 1.42% and 1.35%, respectively, in the Energy Select Sector SPDR Fund (XLE).

In the next part of our series, we’ll discuss the sales performance of these upstream companies.


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