Extraction Oil & Gas Inc (NASDAQ:XOG): Time For A Financial Health Check
Investors are always looking for growth in small-cap stocks like Extraction Oil & Gas Inc (NASDAQ:XOG), with a market cap of US$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Oil and Gas companies, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into XOG here.
How much cash does XOG generate through its operations?
XOG’s debt levels surged from US$933m to US$1.4b over the last 12 months – this includes long-term debt. With this increase in debt, XOG currently has US$274m remaining in cash and short-term investments for investing into the business. Moreover, XOG has generated US$644m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 45%, signalling that XOG’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In XOG’s case, it is able to generate 0.45x cash from its debt capital.
Can XOG pay its short-term liabilities?
Looking at XOG’s US$551m in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$466m, with a current ratio of 0.85x.
Is XOG’s debt level acceptable?
With a debt-to-equity ratio of 72%, XOG can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since XOG is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although XOG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for XOG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Extraction Oil & Gas to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for XOG’s future growth? Take a look at our free research report of analyst consensus for XOG’s outlook.
Valuation: What is XOG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether XOG is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
