Normalized free cash flow
Free cash flow (or FCF) is an important metric for the crude oil (USO) and natural gas (UNG) production (or upstream) sector. FCF is calculated by subtracting capex from operating cash flow (or OCF). However, within the upstream space, free cash flow for each company varies greatly depending on the size of the company’s upstream operations, operating revenues, operating margins, operating cash flows, and capex. Thus, in order to rank the upstream companies in the US using FCF, we have normalized 2017 FCF by dividing it by the 2017 OCF. So, essentially, the normalized FCF is the percentage of operating cash flow turned into free cash flow.
The above chart shows the top seven normalized FCF generating companies from the oil and gas production sector in the US for 2017. In order to rank these companies, we have used only oil and gas producers in the US with market capitalizations of greater than $500 million and a 30-day average volume over 1,000,000 shares.
The best free cash flow generators
Kosmos Energy (KOS), which has normalized 2017 FCF of ~39%, is at the top of the list. Kosmos Energy has a market capitalization of ~$2.4 billion. The other top normalized 2017 FCF generating companies are ConocoPhillips (COP), W&T Offshore (WTI), Cabot Oil & Gas (COG), Murphy Oil (MUR), Marathon Oil (MRO), and Occidental Petroleum (OXY). COP, WTI, COG, MUR, MRO, and OXY have normalized 2017 FCF of ~35%, ~18%, ~15%, 10%, ~7%, and ~7%, respectively. In comparison, for 2017, the upstream industry in the US has negative normalized FCF of -61%.
Among the top seven normalized 2017 FCF companies, ConocoPhillips (COP) has the largest market capitalization of ~$62.9 billion, whereas W&T Offshore (WTI) has the lowest market capitalization of ~$558 million. Except for COG, the other top seven normalized 2017 FCF companies are primarily crude oil (USO) producers. COG is a natural gas (UNG) producer.
In this series
Having looked at the top companies in the context of normalized 2017 free cash flow in the course of this series, we’ll delve into the details of free cash flow and normalized free cash flow trends of these companies. We’ll also look at what Wall Street analysts are saying about these companies.