With oil prices down roughly 50% over the past year, some oil producers are simply trying to survive. Then there's a second group that's just trying to tread water by focusing on pushing costs down to balance cash flow with outflows for capex and dividends. Finally, a third group has emerged in what's really an elite class of oil companies that are thriving in the current environment because they're generating free cash flow while still managing to grow their production. Topping that list are Suncor Energy (NYSE:SU), Oasis Petroleum (NYSE:OAS), and ExxonMobil (NYSE:XOM). Here are the secrets to their success.
The Canadian powerhouse
Through the first three quarters of this year, Suncor Energy has generated C$5.5 billion in cash flow. While Suncor plowed roughly C$2 billion of that amount back into maintenance and used another C$2.7 billion to fund growth projects, the company has still managed to generate C$875 million in free cash flow. In fact, it's generating so much free cash flow that it actually increased its dividend at a time when most oil producers are at best holding dividends flat. Further, Suncor Energy has even restarted its stock buyback program while also going on the offensive in making two notable acquisition overtures. Suffice it to say, Suncor Energy is thriving under the current conditions.
Its secret is simple. First, its integrated business model has really provided a lift to cash flow, with its refining and marketing segment kicking in 42% of its cash flow last quarter, which is up from 22% in the same quarter of last year. In addition, Suncor Energy has pushed its costs down to its lowest level in years, with its oil sands operating costs declining to levels not seen since 2007. When we add those factors to its growing production profile and strong balance sheet, and it puts Suncor in an elite category.
The Bakken gem
Oasis Petroleum, likewise, is generating free cash flow during the current environment even after investing to grow production, and it expects those trends to continue next year, even a $50 oil price. Its secret sauce is lower costs, thanks in part to its own vertical integration and its strong hedge portfolio:
That hedge portfolio helps insulate some of Oasis' cash flow from weak oil prices, much as Suncor's refining assets do for its cash flow. However, it's when this strong cash flow shield is added to Oasis Petroleum's vertical integration that we see the real key to its success. Oasis has a midstream services segment and a well services segment, which work together to improve operational and financial performance by cutting out key middlemen. This advantage enabled Oasis to reduce its well costs and operating costs by 30% and 35%, respectively, year over year. So despite its smaller size, the compelling combination of production growth and free cash flow generation really puts Oasis in an elite class.
The big oil behemoth
So far this year, ExxonMobil has generated $26 billion in cash flow from operations and another $1.6 billion from asset sales. After investing more than $20 billion to both maintain and grow production, Exxon still generated $7.4 billion in free cash flow, which, like Suncor, it used to boost its dividend and buy back stock.
Exxon's success is also due to its integrated business model, with its downstream and chemicals segments driving strong cash flow. In fact, just last quarter its downstream earnings doubled year over year to $2 billion. Further, because of its scale, Exxon can really put pressure on its suppliers and service providers to reduce their costs, which has resulted in a 10% reduction in upstream costs compared with last year. Clearly, Exxon is built to last through any oil price cycle.
Exxon, Oasis, and Suncor are thriving amid lower oil prices because of one really important key factor. While all three are focused on reducing their costs, the real differentiator between this trio and their weaker peers comes down to the integrated business model. Exxon and Suncor are clearly enjoying a natural hedge from their refining assets, while Oasis is benefiting from the lower costs of having its well services performed in house.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.