Why XOG Has the Worst Normalized Free Cash Flow in Upstream Sector



Extraction Oil & Gas’s normalized free cash flow in 2017

As we saw in part one of this series, for 9M17 (the first nine months of 2017), Extraction Oil & Gas (XOG) had the lowest normalized FCF (free cash flow) of -636% among the upstream producers we have been discussing. To know more about our normalized free cash flow methodology and filtering criteria, refer to part one of this series. In this part, we will study why XOG’s free cash flow and normalized free cash flow are the lowest in the upstream industry.

Extraction Oil & Gas’s free cash flow trend

In 3Q17, Extraction Oil & Gas (XOG) reported FCF (free cash flow) of -$371 million, which is much lower when compared with XOG’s FCF of -$22 million in 3Q16. In the last four quarters, Extraction Oil & Gas’s free cash flow showed a mixed trend. On a quarter-over-quarter basis, XOG’s free cash flow fell sharply in 4Q16 but increased in 1Q17 and 2Q17. However, XOG’s free cash flow again dropped steeply in 3Q17.

Extraction Oil & Gas’s normalized free cash flow trend

In the last one year, Extraction Oil & Gas’s (XOG) normalized FCF (free cash flow) decreased from -39% in 3Q16 to -489% in 3Q17. The decrease in XOG’s normalized FCF in the last four quarters can be attributed to the steep increase in XOG’s capital expenditures. XOG’s OCF (operating cash flow) increased from 3Q16 to 3Q17, but the increase in XOG’s capital expenditures were far more than the increase in its OCF.

In the last four quarters, Extraction Oil & Gas’s OCF increased by just ~35% from ~$56 million in 3Q16 to ~$76 million in 3Q17. However, Extraction Oil & Gas’s capital expenditures increased multi-fold by ~470% from ~$78 million in 3Q16 to ~$447 million in 3Q17.

The steep increase in Extraction Oil & Gas’s capital expenditure can be attributed to its production growth strategy where XOG is focused on increasing high-quality inventory of drilling locations in the Greater Wattenberg Field of Colorado’s DJ (Denver-Julesburg) Basin. In the last one year, XOG increased its core net acres by more than 65% to 165,000 net acres in the DJ Basin.

XOG expects its production to grow by ~75% in 2018 and it expects free cash flow neutrality in 2H18. In August 2017, XOG increased its liquidity by means of senior notes offerings of ~$394 million.

Extraction Oil & Gas’s stock performance in 2017

Year-to-date in 2017, XOG’s stock is down by ~26.0%. In comparison, the Energy Select Sector SPDR Fund (XLE), which represents an index of stocks across the energy sector, fell ~3.5%, and the SPDR S&P 500 ETF (SPY) rose ~21.8%.

Next, we will take a look at Chesapeake Energy’s (CHK) free cash flow trends.

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