Investors are willing to pay more for the operating cash flow of the two dominant listed upstream oil and gas companies, which means the stocks are cheap and attractive.
Seplat Petroleum Development Company has a price-to-cash flow (P/CF) ratio of 3.44 percent, this means that the company’s investors are willing to pay N3.44 for every Naira of cash flow, or that the firm’s market value covers its operating cash flow 3 times.
Oando Nigeria Plc, another bellwether company in the industry has a (P/CF) of 0.90 percent, which means its market value cover its operating cash flow 0.99 times.
The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share.
The ratio uses operating cash flow which adds back non-cash expenses such as depreciation and amortization to net income.
The price-to-cash flow ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the price-earnings ratio.
The price-to-cash flow ratio is said to be a better investment valuation indicator than the price-earnings ratio, due to the fact that cash flows cannot be manipulated as easily as earnings, which are affected by depreciation and other non-cash items.
The analysis shows investors are willing to pay more for operating cash of Seplat because they have confidence in the company’s growth potentials, while its expansion plans are expected to deliver a higher return to shareholders in form of higher dividend and share appreciation.
By and large, Seplat and Oando have combined cash from operating activities of N134.45 billion, but the free cash flow could be slim depending on the capital expenditure in their budgets.
A breakdown of the figures shows Seplat has cash flow from operating activities of N94 billion, this compares with Oando’s N40.0 billion.
Upstream companies struggled recently with lower realized prices, as global crude oil prices declined on the back of geopolitical risks and trade tensions.