Released September 06, 2019 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--At two recent Oil & Gas conferences in Denver, company executives, investors and bankers discussed the new mantra facing exploration and production (E&P) companies: free cash flow. That might seem like an esoteric financial metric, catnip for the MBA crowd, but the real-life implications of that metric can be seen in the share price performance of two peer companies: Cabot Oil & Gas Corporation (NYSE: COG) (Houston, Texas) and Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas).
Both are leading producers in the Marcellus Shale. The production profile of each company is weighted toward natural gas. Both firms pride themselves on being able to operate in a low-price environment.
While low gas prices have pummeled the stock prices of gas producers in recent years, some have been bloodied more than others. Over the last two years, Range's stock has fallen about 79%, to a recent price of about $4 per share, while Cabot's shares have fallen roughly 37%, to a recent price of $17. Over that same two-year span, the Standard & Poor's 500 index has increased about 17%.
Why the disparity between Cabot and Range? Free cash flow tells at least part of the story. Defined as cash flow from operations minus capital expenditures (capex), free cash flow gives investors a sense of how much discretionary cash a company is generating. Free cash flow is unencumbered and can be used for a variety of purposes, including shareholder dividends, common stock repurchases, debt repayment, reinvesting in the business or acquiring assets.
Investors are loudly demanding that more of that free cash flow should be returned to them. They have grown less tolerant of E&P firms living beyond their means, loading up on debt to fund future production and banking on higher future prices to make it all work out. For more on the new importance of free cash flow to E&P companies, see September 4, 2019, article - As Oil & Gas Sector Consolidates, Will New Business Models Emerge? and August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
In an interview with Industrial Info, John Durham, a senior financial analyst at Range, said the company's free cash flow was about $8 million for the first half of 2019: cash flow from operations totaled $426 million and its capex was $418 million. That was a decline from the comparable year-earlier period, where Range's free cash flow totaled $39 million ($560 million in cash flow from operations minus $521 million in capex).
In a presentation at EnerCom's The Oil & Gas Conference on August 12, Scott Schroeder, chief financial officer at Cabot Oil & Gas, said the company's free cash flow for the first six months of 2019 was about $381 million. An increase in second-half capex was expected to lower full-year 2019 free cash flow to about $297 million. For 2020, Schroeder estimated free cash flow would reach $550 million to $575 million assuming gas prices averaged $2.70 per million British thermal units (MMBTUs).
For full-year 2018, Cabot's free cash flow totaled $297 million while Range's free cash flow was $138 million.
Click on the image at right to see a chart of Cabot's free cash flow since 2016 and projections for 2019 and 2020.
Compared to its Marcellus rival Range, Cabot has a larger pile of discretionary cash flow, which appears to have acted as a safety net, cushioning the decline of that company's stock compared to Range's.
Click on the image at right to see how Cabot has returned capital to shareholders since 2011, and what it plans to do this year.
Speaking at the EnerCom (Denver, Colorado) conference in Denver last month, Schroeder said, "Energy is a four-letter word" among investors, who have a low level of interest in the sector. He said prospects for his company were strong, driven by low operating costs and a "massive" increase in gas demand and pipeline takeaway capacity. He was referring to two large gas-fired power plants that came online, increased exports of liquefied natural gas and the beginning of operations for portions of the Atlantic Sunrise pipeline. Those projects increased demand by about 1.6 billion cubic feet per day (Bcf/d) this year compared to last year, he told about 2,000 attendees at the event.
Evidently frustrated with investors' short-term focus and demands for a greater share of free cash flow, Schroeder said, "We were generating free cash flow back in 2016, when gas prices were about $1.75 per MMBtu." But he acknowledged "we didn't put our best foot forward in communicating with investors."
Speaking at the same August event, Jeffrey Venture, Cabot's president and chief executive, remarked "Capital markets are saying, 'Live within your cash flow.'"
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
Both are leading producers in the Marcellus Shale. The production profile of each company is weighted toward natural gas. Both firms pride themselves on being able to operate in a low-price environment.
While low gas prices have pummeled the stock prices of gas producers in recent years, some have been bloodied more than others. Over the last two years, Range's stock has fallen about 79%, to a recent price of about $4 per share, while Cabot's shares have fallen roughly 37%, to a recent price of $17. Over that same two-year span, the Standard & Poor's 500 index has increased about 17%.
Why the disparity between Cabot and Range? Free cash flow tells at least part of the story. Defined as cash flow from operations minus capital expenditures (capex), free cash flow gives investors a sense of how much discretionary cash a company is generating. Free cash flow is unencumbered and can be used for a variety of purposes, including shareholder dividends, common stock repurchases, debt repayment, reinvesting in the business or acquiring assets.
Investors are loudly demanding that more of that free cash flow should be returned to them. They have grown less tolerant of E&P firms living beyond their means, loading up on debt to fund future production and banking on higher future prices to make it all work out. For more on the new importance of free cash flow to E&P companies, see September 4, 2019, article - As Oil & Gas Sector Consolidates, Will New Business Models Emerge? and August 19, 2019, article - Oil Executives Pledge Financial Probity, Environmental Protection at Denver Conference.
In an interview with Industrial Info, John Durham, a senior financial analyst at Range, said the company's free cash flow was about $8 million for the first half of 2019: cash flow from operations totaled $426 million and its capex was $418 million. That was a decline from the comparable year-earlier period, where Range's free cash flow totaled $39 million ($560 million in cash flow from operations minus $521 million in capex).
In a presentation at EnerCom's The Oil & Gas Conference on August 12, Scott Schroeder, chief financial officer at Cabot Oil & Gas, said the company's free cash flow for the first six months of 2019 was about $381 million. An increase in second-half capex was expected to lower full-year 2019 free cash flow to about $297 million. For 2020, Schroeder estimated free cash flow would reach $550 million to $575 million assuming gas prices averaged $2.70 per million British thermal units (MMBTUs).
For full-year 2018, Cabot's free cash flow totaled $297 million while Range's free cash flow was $138 million.
Click on the image at right to see a chart of Cabot's free cash flow since 2016 and projections for 2019 and 2020. Compared to its Marcellus rival Range, Cabot has a larger pile of discretionary cash flow, which appears to have acted as a safety net, cushioning the decline of that company's stock compared to Range's.
Click on the image at right to see how Cabot has returned capital to shareholders since 2011, and what it plans to do this year.Speaking at the EnerCom (Denver, Colorado) conference in Denver last month, Schroeder said, "Energy is a four-letter word" among investors, who have a low level of interest in the sector. He said prospects for his company were strong, driven by low operating costs and a "massive" increase in gas demand and pipeline takeaway capacity. He was referring to two large gas-fired power plants that came online, increased exports of liquefied natural gas and the beginning of operations for portions of the Atlantic Sunrise pipeline. Those projects increased demand by about 1.6 billion cubic feet per day (Bcf/d) this year compared to last year, he told about 2,000 attendees at the event.
Evidently frustrated with investors' short-term focus and demands for a greater share of free cash flow, Schroeder said, "We were generating free cash flow back in 2016, when gas prices were about $1.75 per MMBtu." But he acknowledged "we didn't put our best foot forward in communicating with investors."
Speaking at the same August event, Jeffrey Venture, Cabot's president and chief executive, remarked "Capital markets are saying, 'Live within your cash flow.'"
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
