Free Cash Flow, and free thoughts! One of the reasons I like OBE is its free cash flow.
By free cash flow, I mean actual free cash flow - not just cash in excess of the corporate budget.
In 2024 for example, OBE has forecast cash flow of about $440 million (based on WTI of $75).
Its maintance capital - ie the amount of money needed to maintain production at the 2024 level is probably about $220 million (If I remember correctly it was suggested to be about $200 million in 2023 during a Q@A session)
It follows that this year OBE may have about $220 million of free cash flow (ie cash over and above what is needed to maintain current production)
Their enterprize value (debt plus equity) is probably around $1,050 million right now (I say probably because I don't know the exact debt as I write this).
Meaning they generate about 21% return on capital (220/1050).
So first off, 21% is a really good return on capital. It is also based on $75 WTI, which I think is on the low side.
OBE has also said that a $10 increase in WTI will increase their cash flow by about $86 million in 2024.
ie, if that $75 WTI were to be $80 instead, the cash flow would be $483 million (440 + 43), and the return on capital would be 25% (483 - 220)/1050
ie, a little improvement in the price of WTI, leads to a large increase in free cash flow.
This works in reverse too.
If they have $220 million of free cash flow at $75WTI, and if a $10 change in WTI causes a $86 million change in cash flow, then how much can WTI drop, before there is no free cash flow (ie the cash generated is equal to the amount of cash needed to maintain production?).
220/86 = 25.6.
That means the WTI price would have drop by $25.6 for OBE's cash flow to match its maintenance cash needs.
$75WTI - 25.6 = $49.4 WTI.
ie, WTI could drop all the way to $49.4 (call it $50) before OBE would have zero free cash flow.
Its not quite that simple, in that maintenance capital won't include about $20 million in annual decommissioning expense, and about $9 million in their "Onorous" lease expense (which will end in 2024) and one or two others. So the zero free cash flow number may be closer to WTI $53.
My point here is OBE is very resiliant to lower WTI prices, and at the same time, offers a strong return on equity percentage at current WTI prices, and stronger still, if WTI prices improve.
Its all this free cash flow that gives OBE the ability to rapidly grow production and buy back its shares and pay back debt.
AND, using today's free cash flow to grow its production, means more free cash flow next year, and the year after.
For example, OBE's forecast cash flow in 2026 is $664 million. They suggested their maintenance capital at that production level would be around $300 million (if I remember correctly). That would mean about $364 million in free cash flow (at the same $75 WTI) - up from about $220 million in 2024. Whats even better, is their forecast sensitivity to a $10 change in WTI also increases, from $86 million to $144
That gives about the same WTI$50 needed to have zero free cash flow (ie the same down side protection), but a move up in WTI from $75 to $85 would take the free cash flow from about $364 to $508 million.
Put it all together, and you get a solid 20% return on capital (actually on enterprize value, ie including debt) at current "low" oil prices, along with downside production protection to $50 wti ish, and rapidly increasing return on capital over the next 2 years as free cash is reinvested back into the company.
But it gets even better. Their reinvestment plan doesn't use all their expected cash flow at WTI $75. There is extra cash, that will be used to buy back shares and/or reduce debt. And if WTI is higher than $75, there will be lots more extra cash to by back even more shares etc.
What this means if WTI stays about $75 or goes higher, cash flow per share increases from two directions, more cash, and less shares.
Investing is about Risk and Reward. I think one is hard pressed to find a more attractive risk vs reward profile elsewhere in the sector. ie downside protection, and upside potential.
It gets even better, when there are multiple ways of winning. In this case I see several different ways of winning.
Production increases - Shares outstanding decline - Debt Declines - Oil prices - Gas prices.
That is 5 different variables. Any one of them can increase the share price.
When you have mulitple positive variables it means that if one or two go down, the others can make up for it.
Its like having a portfolio within a single investment - you don't see those often.
Anyway, that is why I like OBE, you may or may not agree. And I may or may not be right! How do your favourites compare?