Reading news reports on earnings for companies like BP (NYSE:BP) is extremely frustrating. This quarter, when the company reported a decline in underlying operating profits of 16% to $3.0 billion, media outlets such as The New York Times were quick to jump on the decline in oil prices and much weaker results from its ownership stake in Russian oil giant Rosneft. In all of its dire news for the quarter, though, there was one thing that these news outlets missed that gives a much better picture of BP today. Let's take a look at what the financial media didn't notice and see what the doom and gloomers are missing out on.

Cash Moves Everything Around Me

Earnings, earnings, earnings. Every quarter we always talk about earnings and judge the financial health of a company based on these figures. Here's the one issue with those numbers, they are very easily manipulated by things like depreciation that aren't real cash costs. So those numbers aren't necessarily a true sign of financial health.

For a company like BP that needs to spend billions in capital expenditures every quarter, a better method for looking at the health of the company is to look at its operational cash flow generation. When we look at the company through this lens, this past quarter looked much, much better than what many news releases seem to suggest. Operational cash flow generated in the third quarter was $9.4 billion, a near 50% jump on a year-over-year basis.

The company was able to achieve this despite lower oil prices as well as the weakness in Russia because the projects it has pursued in recent years have been much, much more productive cash generators as it has revamped its portfolio. Projects such as the upgrade of its Whiting, Indiana, refinery to run heavy Canadian oil sands and increased oil production from the United States have all made a major impact toward increasing cash flow rather than simply pursuing production increases. 

In fact, this quarter was just another instance this year where BP has significantly grown its operational cash flow.

Source: BP Investor Presentation

This is an especially noteworthy moment for the company because not only is the company generating enough operational cash flow to more than adequately cover its capital expenditures, but it also can cover its shareholder initiatives of buybacks and dividends without the assistance of asset sales. 

What a Fool Believes

For any investor that is looking at integrated oil and gas stocks such as BP, cash generation is key. In fact, I might go so far as to say that an integrated oil and gas company's success is much more based on its ability to generate cash than its earnings power. When you look at those cash flow figures above, it makes a lot more sense that the company raised its dividend payment by 5.5% this quarter than if you look at its earnings results.

There wasn't a whole lot--or anything, really--in this quarterly earnings release that should change the investment thesis on BP much. It appears that its new corporate strategy of focusing on operational cash generation is working very well despite lower oil prices and the troubles in Russia. While buying shares today at a price to earnings of 12.06 times isn't the cheapest the company has been in recent years, sliding oil prices could make others wary, and the long-term investor could snap up shares of a company that is showing some of its best operational performance in years at a pretty decent price.  

Tyler Crowe has no position in any stocks mentioned. You can follow him at under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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