For beginners, Investopedia has a video about free cash flow here : cash flow from operations less all capital expenditures. It would be a huge step forward for executive teams to put this measure on all MLP press releases, in our view.
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We’re very happy to announce that ONEOK (OKE/OKS) has released a form of a non-GAAP measure of free cash flow in its 2016 outlook press release. Even though we still would like more clarity around the measure (stand-alone capital spending, etc.), we applaud management’s step forward in disclosing additional information to investors.
Valuentum has been calling for the disclosure of non-GAAP free cash flow, as measured by cash flow from operations less all capital spending, in press releases for some time (in addition to other measures management would like to release: distributable cash flow, etc.), and we’re happy that ONEOK Partners appears to be the first, from what we can tell, to take the step forward to help MLP investors better understand free cash flow.
In ONEOK’s case, why not – traditional free cash flow less expected distributions is fantastic (relative to peers, of course)! – see table below.
We believe the news this week represents a victory for MLP investors when it comes to additional disclosures. Here’s what we’re talking about. These are the measures disclosed in ONEOK’s most recent press release, the 2016 outlook, released December 21, 2015 (note the measure of free cash flow):
ONEOK and ONEOK Partners have disclosed in this news release expected 2016 cash flow available for dividends, free cash flow, dividend coverage ratio, adjusted EBITDA, distributable cash flow and cash distribution coverage ratio, which are non-GAAP financial metrics, used to measure ONEOK’s and ONEOK Partners’ financial performance.
Please compare this to ONEOK’s disclosures in the third-quarter results, released November 3:
ONEOK Partners has disclosed in this news release adjusted EBITDA, DCF, distributable cash flow to limited partners per limited partner unit and cash distribution coverage ratio, which are non-GAAP financial metrics used to measure the partnership’s financial performance.
ONEOK’s “free cash flow” guidance doesn’t go so far as to say whether they are deducting all capital expenditures, as it defers to “standalone capital spending,” nor does it actually use cash flow from operations, but we like the step forward in any case. The closer the industry moves to offering investors non-GAAP free cash flow, as measured by cash flow from operations less all capital spending, the better decisions investors can make, in our view, as it relates to assessing the risks of the business, not the least of which is capital-market dependency. Though ONEOK’s measure appears to fall short from standard measures of non-GAAP free cash flow, we’re still pleased – as long as investors understand that the disclosure is still not traditional non-GAAP free cash flow (and it doesn’t lead to more confusion).
We think it is worth mentioning that ONEOK Partners’ expected performance in 2016 appears to be the exception, not the norm when it comes to MLPs. For one, management noted that it expects adjusted EBITDA at ONEOK Partners (OKS) to be ~$1.88 billion for 2016 and both growth and maintenance capital spending of ~$460 million and ~$140 million at the entity, totaling about ~$600 million in total capital spending for the year. If we assume that EBITDA can be considered a proxy in part for cash flow from operations, assuming neutral working capital movements, after deducting such capex, we’re looking at non-GAAP “free cash flow” of close to ~$1.28 billion for the year. Cash distributions were $1.05 billion, $909.7 million, and $760.9 million in 2014, 2013, and 2012 at Oneok Partners, respectively – meaning traditional free cash flow, by our translation of cash flow from operations less all capital spending, will likely cover distribution payments alone in 2016.
This is fantastic compared to its peers. From our perspective, we don’t understand why analysts were saying that ONEOK Partners would be in trouble?
Based on its guidance for 2016, the distribution at ONEOK Partners is one of the strongest out of all the MLPs – the entity literally looks like it will cover distributions with traditional free cash flow generation for the year – not to mention that the equity markets appear open to the company as it sits on substantial liquidity. It is not surprising why shares have spiked considerably! Unfortunately, however, ONEOK Partners is the exception. For most MLPs, and almost all in our coverage universe, traditional free cash flow generation, as measured by cash flow from operations less all capital spending is substantially lower than distributions paid. In some cases, traditional free cash flow is materially negative.
Here is a table that shows traditional free cash flow less distributions, dividends through the first half of 2015 for our MLP coverage universe, for example (note: energy resource pricing has deteriorated since the end of the second quarter) – the column called free cash flow after distributions, dividends is the one to pay attention to (this is through the first half of 2015 – we expect to update this table following 2015 results):
Image Source: Valuentum Securities
We hope the news this week is a step forward by executive teams to help investors better understand traditional free cash flow, as measured by cash flow from operations less all capital spending, and not the beginning of just throwing around the word “free cash flow” to add further confusion to the mix. In Valuentum’s view, the best measure of free cash flow is one that deducts all capital spending (both growth and maintenance) from cash flow from operations. Thank you for reading!
For beginners, Investopedia has a video about free cash flow here : cash flow from operations less all capital expenditures. Why can’t we get this measure on all MLP press releases?