By Philip van Doorn
These companies are expected to have very high free cash flow yields
The move this week by OPEC+ countries to cut oil production might only be the first of a group of cuts that will raise prices for consumers while rewarding investors.
Below is a screen of U.S.-listed energy companies through 2024, showing which ones are expected to generate the highest levels of free cash flow relative to current share prices.
For U.S. oil companies and shareholders, the focus is cash flow rather than production increases. These companies (and their bankrupt competitors) learned a hard lesson when they transformed the world energy market through the shale oil expansion but then caused an oversupply and a tumbling of prices from June 2014 through mid-February 2016. Following the temporary and intense disruption early in 2020 because of the COVID-19 pandemic, prices pretty much rose through June 2022 before sliding back a bit.
On Sunday, Saudi Arabia led the OPEC+ group with a surprise production cut of about 1.16 million barrels a day. This caused a rally for oil and energy-industry stocks on Monday, which cooled Tuesday and Wednesday.
Here's a 10-year price chart of forward-month contracts for West Texas Intermediate crude oil :
Read:The commodity supercycle is still young, these strategists say. Here's why
On Monday, Jefferies analyst Sean Darby called the production cut a "a pre-emptive move" to offset expected "demand destruction" in the U.S., in a recession scenario following the banking crisis. "The move could be seen as an attempt by Saudi Arabia to 'cold shoulder' the U.S. in favor of China where around one quarter of Saudi's oil exports are destined," Darby added in a note to clients. Saudi's portion of the OPEC+ group's cut is 500,000 barrels a day.
BCA Research analyst Robert P. Ryan expects the OPEC+ move to help push average prices for Brent crude oil above $100 this year. Brent typically trades a bit below WTI. In a client note on Monday, Ryan called Saudi Arabia's move "consistent" with the kingdom's "policy shift is to hedge its economy from the risk of unilateral actions by the US and its allies."
Regardless of individual countries' motivations, the oil market is very much a world market. Higher prices mean higher profits for U.S. producers. And these companies have been reluctant to overinvest in production.
Exxon Mobil Corp. (XOM) CFO Kathryn Mikells emphasized the integrated energy giant's "balanced approach" toward "ensuring that we have sustainable, growing, competitive dividends and [are] efficiently returning cash to shareholders," during a Jan. 31 conference call with analysts, according to a transcript provided by FactSet.
Showing investors the money
Here's a simple screen based on estimated free cash flow (FCF) per share in 2024. A company's free cash flow is its remaining cash flow after capital expenditures. This is a critical measure for energy-stock investors. A focus on production expansion reduces FCF and ultimately can increase supply enough to push prices lower and feed a cycle that could be painful for investors.
The following screen began with the 69 companies in the energy sector of the S&P 1500 Composite Index, which itself is made up of the S&P 500 , the S&P 400 Mid Cap Index (MID) and the S&P Small Cap 600 Index .
One way to measure a company's potential to raise dividends or buy back shares (which can lower the share count to raise earnings and cash flow per share) is to calculate a free cash flow yield. This is typically done using consensus FCF estimates for the following 12 months and dividing them by current share prices. This figure can be compared with the current dividend yield to see if there is "headroom" for dividend increases or other deployment of cash, hopefully to benefit shareholders.
This time we have dispensed with 12-month FCF/dividend tests and simply divided consensus 2024 FCF per share estimates by current share prices. Among the 69 companies in the S&P 1500, the 2024 estimates are available for 42 companies that are covered by at least five analysts polled by FactSet.
These 15 ranked highest for consensus 2024 FCF estimates divided by closing share prices on April 4:
Company Ticker 2024 FCF estimate/ April 4 price Estimated 2024 FCF per share April 4 price Nabors Industries Ltd. NBR 40.36% $51.08 $126.55 NexTier Oilfield Solutions Inc. NEX 30.20% $2.57 $8.51 EQT Corp. EQT 27.66% $8.99 $32.48 Range Resources Corp. RRC 27.38% $7.35 $26.84 Par Pacific Holdings Inc. PARR 26.28% $7.11 $27.05 ProPetro Holding Corp. PUMP 24.71% $1.94 $7.85 Antero Resources Corp. AR 22.49% $5.38 $23.90 Marathon Oil Corp. MRO 19.84% $5.11 $25.73 Patterson-UTI Energy Inc. PTEN 18.77% $2.30 $12.23 Coterra Energy Inc. CTRA 16.14% $4.05 $25.09 PBF Energy Inc. Class A PBF 15.31% $6.11 $39.91 Valero Energy Corp. VLO 15.16% $19.32 $127.43 Matador Resources Co. MTDR 14.12% $7.09 $50.17 Marathon Petroleum Corp. MPC 14.01% $17.63 $125.82 Southwestern Energy Co. SWN 13.92% $0.71 $5.10 Source: FactSet
Click on the ticker for more about each company.
Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
In case you're wondering, the consensus 2024 FCF per share estimate for Exxon Mobile was $10.89, or 9.47% of its closing price of $115.02 on April 4. For Chevron Corp. (CVX), the estimated 2024 FCF yield was 9.01%, based on a consensus 2024 FCF estimate of $15.23 and a closing price of $169.04.
If you see any companies of interest, based on this one-factor screen, the next step is to do your own research to form your own opinion of the companies' viability over the next decade, at least.
Don't miss:14 dividend stocks yielding 4% or more that are expected to increase payouts in 2023 and 2024
-Philip van Doorn
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April 08, 2023 11:41 ET (15:41 GMT)
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