Free cash flow (FCF) is often viewed as a destination akin to the Promised Land. Once a certain inflection point has been crossed, the hope is for a growing wedge of FCF as output moves higher, commodity prices stay constant and economies of scale kick in to keep costs down. But the world doesn’t always work that way. And much can depend on where an E&P is on the path to the Promised Land.

A recent heightened focus on FCF reflects the unease among some investors with the host of underlying inputs used to value E&Ps histori­cally. E&P analysis has at times focused on net asset value (NAV), enterprise value-to-EBIT­DA (EV-to-EBITDA) and debt-adjusted cash flow per share growth, to name a few. In turn, these relied on other variables: rig counts, pro­duction growth, commodity prices, etc.

As investors, and especially generalist in­vestors, have sought to bring clarity to E&P performance, some have turned to the basic elements of FCF as a minimalist marker.

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