RE:RE:Cashflow Dividend and CAPEXFree cash flow when I took my CFA and worked in an investment research department just excluded all cap ex and did not distinguish between maintenance expenditures or otherwise. That is how free cash flow was defined and many times companies never disclosed what was maintenance or growth portions of their cap ex so the exercise would have been difficult to calculate.Over the years and more recently, especially in the energy industry, it propbably does make sense when comparing many companies within the same industry, to try and look at what level of cap ex is required to maintain production. That is possible with the models we are now able to develop and the information most companies in the energy sector provide. I recall when I used to analyze utility and pipeline companies many years ago, we had the notion that their rate bases which they had been awarded a regulatory rate of return on had to growth by spending to generate growth. Quite simply, a company had to spend more than their depreciation.
So I have a quarterly model on CPG with many sets of assupmtions, but all reconciled back to the previous quaters casf flow and income statements reported to ensure it ties inas best I can to their numbers.
The question that keeps coming up under this discussion I hear is "what level of cap x is maintenance?"
The answer is ... all of it. But it depends on what assumptions you use. What price of oil and what capital efficiency rate at bringing on new production and what decline rate or even what percentage of capital is allocated to drilling verses facities.
I have tried to estimate the decline rate based on past quaters numbers. (the quaterly decline rate and the production equals the quarterly change in production. But you still end up having to make a reasonable estimate of one or the other or both)
I use 20,000 capital efficiency for 2015 and 18,000 next year. The overall decline rate on all production I assume averages 39% in 2015 and 37% in 2016. WTI 2015 assumed Q3 $48,Q4 $50 and 2016 $50 to see how they fare. Year end 2016 production ends up being flat at 166,887 b/d to 2015 which includes their acquisitions in 2015. (Average production is up 4% due to the timing of aquisitions.)
2016: Cash Flow $1.87 billion, total but cash dividends only $1 billion... dividends $1.43 billion, total cap ex $1.55 billion same as 2015. Debt goes up by $0.680 billion. This has been their approach over the years so don't panic. Their balance sheet can handle it but not past 2016 if oil stays around $50. ( I think oil will be a lot higher) Plus we have waterfloods not factored in and more acquisitions which will lower the decline rate and improve the ratios. Plus they can cut back cap x a bit further I believe.
So all of their cap ex at their stated levels is required just to maintain production at $50 oil but many other assumptions have been made in this statement. So they borrow at the low end of the commodity cycle like they do at the top. $680 million new debt and I don't really care if one says we are either borrowing for dividend or for cap ex.
I personally like to know how much cap ex is required to maintain production and that is what I play around with in my model. But the free cash flow I use ultimately includes all cap ex as this is the amount that goes towards decreasing or increasing debt. I think this is the prudent way of looking at it when analyzing a stock by itself to see the final left overs of cash flow and the impact on the balance sheet. But brokers analysts who maintain data bases of many companies...sure....then it makes sense to also try and include the maintenance capital approach to compare companies on the same bases.
To sum it up, one should be looking at both, but all capital expenditures are what makes the difference between making your covenants or not. Bankers ,when lending, I can assure you will you all of the cap ex expenditures.