Understanding Fund Generation among Major OFS Companies

Weatherford International’s (WFT) internal cash generation has not been adequate to cover its external obligations. In 2015, WFT’s internal sources of funds as a percentage of external fund requirements equaled a meager 4%. Please note that internal sources of funds are expressed as free cash flow plus cash and marketable securities. External fund requirements are defined as contractual obligations plus dividend payments.

WFT’s external fund requirements have been high in the past few years as a result of its large debt. By the end of 2015, its contractual obligations totaled ~$13.5 billion—the largest in our portfolio. Notably, WFT makes up 0.26% of the ProShares Ultra Oil & Gas ETF (DIG).

By comparison, Core Laboratories’ (CLB) internal cash generation was not adequate to cover its external obligations in 2015 either. In 2015, CLB’s internal sources of funds as a percentage of external fund requirements came to 37%. The ratio has decreased steadily over the past seven years, indicating CLB’s weakening debt repayment capacity.

RPC Inc.’s (RES) internal cash generation was adequate to cover its external obligations in 2015. In 2015, RES’s internal sources of funds as a percentage of external fund requirements came to 320%. The ratio improved sharply in 2015 as a result of higher free cash flow and a decreased debt level.

Dril-Quip, Inc.’s (DRQ) internal cash generation was more than adequate to cover its external obligations in 2015. In 2015, RES’s internal sources of funds as a percentage of external fund requirements came to a whopping 3,807%. DRQ has no debt, but it does not pay a dividend, which is why it has such a comfortable ratio.

Now it’s time to compare valuations.