Jefferies: Oil crash shines light on energy companies' cash flow, but all good

By Barani Krishnan 

Investing.com - Last week's epic oil price crash has forced a harsh light on the finances of energy companies but all seems well for now in the sector, especially free cash flow, analysts at investment bank Jefferies said Tuesday.

As U.S. crude's West Texas Intermediate, or WTI, benchmark descended below $70 per barrel last week, Jefferies' analysts said they fielded calls late into Friday and over the weekend and the consensus it reached showed oil's worst week since the height of the COVID-19 outbreak in April 2020 was a "combination of macro positioning, volatility in rates, options expiry and negative gamma leading to significant unwinds."

"The most immediate energy investor concern is around contagion / 'ring fencing', but also tightening of future credit availability / loan growth, loss of consumer confidence and impact on 2H23 demand," the analysts said in a note, referring to demand in the second half of the year. "This will play out over weeks not days, per most investors we spoke to. The unknown generally leads to cutting risk exposure and de-grossing (from both long-onlys and relative values)."

Jefferies also pointed out that portfolio managers "can only sell what they have," adding that this helped explain relative moves like Schlumberger NV (NYSE:SLB) being down 12.5% last week.

"There is clearly lots on the agenda (i.e., the Fed, contagion, regional bank credit, etc.), and we're not qualified to opine. But in crude oil, while the move down appeared tied to money flow, the move up will likely be about fundamental draws, S&D balances in visible inventories, and potentially even OPEC+ action (April 3rd). Significant refining turns are scheduled in North America through next week."

But the investment bank also said it did not think the crash would be as drawn out as those of the past. To prove its point, Jefferies rounded up the finances of five energy companies — Antero Resources (NYSE:AR), Civitas Resources (NYSE:CIVI), Northern Oil&Gas (NYSE:NOG), Murphy Oil (NYSE:MUR) and Berry Petroleum Corp. (NASDAQ:BRY) — to show little threat to free cash flow or FCF.

"With the significant drop in crude oil prices, the most immediate investor focus within energy was on E&Ps (earnings and profits). But the companies [in] this cycle are in vastly different financial shape than in the past. The leverage today is significantly lower. How about FCF Breakeven? Taking the above analysis one step further, several requests were for the FCF breakeven price for the oil E&Ps in '23 / '24. There are lots of ways to do it. We solved [it using] oil price post base dividend and including existing capital plans. Per our estimates, the oil E&Ps would require an average WTI price of $53/$51 per barrel for ‘23/’24 to break even."

WTI was trading at above $68 per barrel at the time of writing.