Exxon: Applying Free Cash Flow Analysis-Minyanville

BUSINESS & MARKETS

LIFE & MONEY

VIDEO

COMMUNITY

SUBSCRIPTIONS & PRODUCTS

Exxon: Applying Free Cash Flow Analysis

Matt Ford Jun 09, 2008 1:30 pm


		When examining an investment idea, review historical trends.

Editor’s note: This missive is the third in a series on valuing securities (here’s part 1 and part 2). Those new to financial markets can find more content with an educational bent at Minyanville’s Education page.

With a little perseverance you can get things done
Without a blind adherence that has conquered some

STOCKS
RELATED ARTICLES
ALSO BY...

SEARCH:

Fuel a Four-Letter Word
Finding Opportunities in Cash America, Natus Medical

How to Tell If You're a Deflationist or Inflationist
What's Your Investing Style?
Don't Put All Your Nest Eggs in One Basket
Getting Ready to Invest
Everyone Is Buying It -- But Should You?

--Corey Hart

In a previous missive we discussed the merits of free cash flow for valuing securities. To get a feel for this concept in motion, let's take a look at a company that has been generating mammoth free cash flow, Exxon Mobil (XOM). Recall that free cash flow (FCF) equals operating cash flow (OCF) minus capital expenditures (capex).

Annual XOM Free Cash Flow ($ Billions)

Year	OCF	Capex	FCF
2002	21.3	11.4	9.8
2003	28.5	12.9	15.6
2004	40.6	12.0	28.6
2005	48.1	13.8	34.3
2006	49.3	15.5	33.8
2007	52.0	15.4	36.6

You can see that XOM's operating cash flow has increased by about 150% over the past few years. During this period, capital expenditures have increased less than 50%. As a result, free cash flow has increased nearly fourfold, reaching nearly $37 billion in 2007.

This is a remarkable level of FCF--even for enterprises in the 'sweet spot' energy space. Indeed, many favorite domestic 'go to' trading names in oil and gas production, such as Apache (APA), Devon Energy (DEV) and XTO Energy (XTO) have not been consistently FCF positive throughout this same period. While operating cash flows have increased significantly for these enterprises, capital expenditures have increased commensurately, leaving less FCF than one might expect given the favorable secular winds blowing at the backs of firms in this sector.

One of the first things that I do when examining an investment idea is to review historical FCF trends (similar to what we've done above). This exercise helps me grab a toe hold on the economic value producing potential of an enterprise.

How can we use FCF info to estimate the 'fair value' of a stock? Stay tuned.


Rate this article:			(0 Votes)

more BUSINESS & MARKETS articles »

Daily Article Index �

tags:

FCF, DEV, OPERATIONS, OCF, APACHE

Comments (3)

See All Comments »

Mr Bacan

View Exchanges


06-09-2008, 1:52 pm
Matt, Thanks for the article. These are the days to keep the financial mind sharp. Things are rapidly changing. Interesting, that you should pick XOM as the example... I look forward to the next part. Read More

Matt Ford

View Exchanges


06-09-2008, 5:49 pm
Appreciate the feedback. It's been a long time since fundamental analysis and valuation have been front and center. My sense is that a 'comeback' is pending. As you noted, now seems a good time to 'tune' th Read More

Back Lash

View Exchanges


06-10-2008, 8:52 pm
looks like xom is slackin, what w/ capex down a smidgen 07 i think their chairman said they weren't too excited about exploration my guess is they are looking for another business to get into isn't t Read More


discuss this article and more on the mv exchange

No positions in stocks mentioned.

Get real-time options trading ideas from Steve Smith, veteran options trader and newsletter author, plus let him show you the way to cut risk and boost your returns through the strategic use of options. Click here for a free 14 day trial to OptionSmith by Steve Smith.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2009 Minyanville Media, Inc. All Rights Reserved.