The move this week by OPEC+ countries to cut oil production might only be the first of a group of cuts that will raise prices for consumers while rewarding investors.
Below is a screen of U.S.-listed energy companies through 2024, showing which ones are expected to generate the highest levels of free cash flow relative to current share prices. On Monday, Jefferies analyst Sean Darby called the production cut a “a pre-emptive move” to offset expected “demand destruction” in the U.S., in a recession scenario following the banking crisis. “The move could be seen as an attempt by Saudi Arabia to ‘cold shoulder’ the U.S. in favor of China where around one quarter of Saudi’s oil exports are destined,” Darby added in a note to clients. Saudi’s portion of the OPEC+ group’s cut is 500,000 barrels a day.
Exxon Mobil Corp. XOM CFO Kathryn Mikells emphasized the integrated energy giant’s “balanced approach” toward “ensuring that we have sustainable, growing, competitive dividends and [are] efficiently returning cash to shareholders,” during a Jan. 31 conference call with analysts, according to a transcript provided by FactSet.
One way to measure a company’s potential to raise dividends or buy back shares is to calculate a free cash flow yield. This is typically done using consensus FCF estimates for the following 12 months and dividing them by current share prices. This figure can be compared with the current dividend yield to see if there is “headroom” for dividend increases or other deployment of cash, hopefully to benefit shareholders.