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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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What Will Cash Flow Look Like For Big Oil Next Year?

  • Oil prices have given up most of this year’s gains.
  • Many commodity experts remain bullish on the long-term trajectory of the energy sector.
  • Jefferies has singled out 20 companies with the highest free cash flow yields.
Drilling rig

  Crude oil prices have been paring back earlier gains, briefly turning negative after Reuters reported that OPEC+ likely will maintain its current oil production policy at the group's meeting next week. Reuters says five OPEC+ sources have informed it that the Sunday meeting would most likely roll over existing policy, while two other sources said the group could discuss another output cut though the likelihood of another cut is considered low.

Thankfully, oil stocks have been much more consistent than the commodity they track, staging a powerful rally even as oil prices have fallen sharply since the last OPEC meeting. The energy sector’s leading benchmark, the Energy Select Sector SPDR Fund (NYSEARCA: XLE), has climbed 33% in the past two months, while average crude spot prices have declined 18%. XLE now boasts a 59.3% return in the year-to-date, the best of any U.S. market sector. 

Another surprising finding: energy stocks remain cheap despite the huge runup. Not only has the sector widely outperformed the market, but companies within this sector remain relatively cheap, undervalued and come with above-average projected earnings growth. The energy sector has an average Forward P/E based on 2023 EPS estimate of just 9.9, way lower than the S&P 500 average multiple of 17.1.

While oil prices have given up most of this year’s gains, many commodity experts remain bullish on the long-term trajectory of the energy sector, with Jefferies’ global equity strategist Sean Darby writing, “The lack of upstream investment over the past decade and an unwillingness of developed world economies to add sufficient capacity domestically, preferring ‘renewables,’ has meant that global energy companies have run their businesses for cash.

Related: Source: Don’t Expect Any Oil Supply Surprises From The Sunday OPEC+ Meeting

With many energy companies putting more emphasis on returning more cash to shareholders rather than using it for expansion purposes, the Jefferies team has screened energy stocks and listed 20 with the highest free cash flow yields. Free cash flow yield is a financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. The ratio is calculated by taking the free cash flow per share divided by the current share price. A high free-cash-flow yield result shows us that a company is generating enough cash to satisfy its debt and other obligations, including dividend payouts. Free cash flow yield is considered a more accurate representation of investment returns compared to yields based on cash flow not fully returnable or accounting earnings.

1. Equinor ASA         

Est. 2023 FCF Yield: 27.72%

Est. 2023 “headroom”:25.61%

Norway's largest National Oil Company (NOC) Equinor ASA (NYSE: EQNR) engages in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products in Norway and internationally.

For decades, Equinor has been supplying the EU with natural gas and is now reaping the benefits of high gas prices as the bloc moves away from Russian gas--which explains why it’s the biggest gusher of cash here. But it’s not just content with its existing gas fields. A week ago, Equinor announced that it had submitted a plan for the development and operation of the Irpa gas discovery in the Norwegian Sea.

The company and its partners plan to spend 14.8B Norwegian crowns (~$1.4B) to unlock an estimated 20B standard cubic meters of recoverable gas reserves, equivalent to 124M boe or the consumption of nearly 2.4M British households over a period of seven years. The development will utilize existing infrastructure on the nearby Aasta Hansteen field, the gas will be delivered via the Langeled pipeline system to customers in the U.K. and Europe.

2. EQT Corp.        

Est. 2023 FCF Yield: 24.61%

Est. 2023 “headroom”:23.21%

EQT Corporation (NYSE: EQT) is a U.S.-based natural gas production company producing natural gas, natural gas liquids (NGLs), including ethane, propane, isobutane, butane, and natural gasoline. EQT is one of the eight energy stocks Jeffries has rated a Buy alongside Exxon Mobil (NYSE:XOM), Valero Energy (NYSE: VAL), ConocoPhillips (NYSE:COP), Halliburton Co.(NYSE: HAL), Baker Hughes Co. (NASDAQ: BKR),Schlumberger Ltd. (NYSE:SLB) and EOG Resources Inc. (NYSE: EOG).

EQT is a big cheerleader of boosting American LNG exports to the world. Back in April, the company unveiled a plan centered on producing more liquified natural gas (LNG) by dramatically increasing natural gas drilling in Appalachia and around the country's shale basins, as well as pipeline and export terminal capacity, which it said would not only boost United States energy security, but also help break the global reliance on coal and on countries like Russia and Iran.

3. Eni S.p.A.                 

Est. 2023 FCF Yield: 24.22%

Est. 2023 “headroom”:18.02%

Italy’s NOC Eni S.p.A. (NYSE: E) engages in the exploration, development, and production of crude oil and natural gas in Italy and internationally.

On 13th November 2022, Eni achieved a significant milestone after the first shipment of liquefied natural gas (LNG) produced from the Coral gas field, in the ultra-deep waters of the Rovuma Basin off the coast of Mozambique, departed from Coral Sul Floating Liquefied Natural Gas (FLNG) facility. According to Eni’s website, Coral Sul FLNG has a gas liquefaction capacity of 3.4 million tons per year and will produce LNG from the 450 billion cubic meters of gas of the Coral reservoir. On 23th November the President of Mozambique, Filipe Jacinto Nyusi, visited and inaugurated the Coral-Sul FLNG installation, built to develop the Coral South, a landmark project for the gas industry, is projecting Mozambique onto the global LNG stage. At the same time, it makes an important contribution to energy security and to the diversification of gas supplies in Europe.

But Eni is also making other offshore plays elsewhere. Eni, which holds a 40% share of Block 9 in Lebanese waters, together with majority owner TotalEnergies (NYSE:TTE) have signed a framework agreement with Israel that will allow them to start exploring a prospect that could extend from Block 9 into Israeli waters. According to Lebanon, the agreement has nothing to do with normalization of relations with Israel. This is purely about future gas discoveries that could  help pull Lebanon survive an economic crisis.

4. Marathon Oil Corp.                      

Est. 2023 FCF Yield: 21.19%

Est. 2023 “headroom”:20.13%

Houston, Texas-based Marathon Oil Corporation (NYSE: MRO) engages in the exploration, production, and marketing of crude oil and condensate, natural gas liquids, and natural gas in the United States.


A month ago, Marathon announced that it had agreed to acquire assets from the Eagle Ford shale in south Texas from Ensign Natural Resources for $3B, nearly doubling its position in the basin near the company's legacy holdings. That deal nets Marathon 130,000 net acres with 700 wells to nicely expand its Eagle Ford position with a 97% working interest.

Marathon expects the deal will be "immediately and significantly accretive to key financial metrics," including a 17% increase to 2023 operating cash flow and a 15% increase to free cash flow, immediately enhancing shareholder distributions.

5. BP Plc             

Est. 2023 FCF Yield: 17.85%

Est. 2023 “headroom”:13.79%

The UK’s largest energy company BP Plc (NYSE: BP) is an integrated oil and gas company but also with deep interests in renewable energy.

BP recently won a contract to market Guyana' s share of crude oil produced over the next year from two offshore production platforms. The UK energy giant will replace Saudi Aramco’s trading unit in a deal to market the state's share produced from the Liza Destiny and Liza Unity platforms at no charge per barrel. The Guyana government recently said it would auction 14 more offshore blocks in a bid to increase output by adding more oil producers. However, it’s yet to disclose a timetable but has indicated it could hold the auction by May.

With ~11 billion barrels found to date, Guyana is home to one of the largest oil discoveries over the last decade. U.S. oil and gas supermajor Exxon Mobil is one of the largest players in Guyana, and has been developing production in offshore Guyana at a pace that "far exceeds the industry average”

By Alex Kimani for Oilprice.com

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