If you own a company in the commodity business which means the price of the underlying product is traded on markets and this means they go up and down, one of the most important pieces of information is if the price of the commodity how much does the company benefit? In an article about the oil industry by Shawn McCarthy and Jeff Lewis titled Back in the black: the new era of prudent oil, within the article is a quote by the CEO of a company called Crescent Point. They drill in the Bakken foundation and the CEO said for every $1 increase in the price of oil, their cash flow raises $65 million. With that figure you can now consider what is your outlook for the price of oil?

In the article, as the price of oil goes up and down so does what the company does or does not do. When prices are lower, the company reexamines its alternatives such as can we use video technology more? can we use solar panels on its wells? what costs can be cut? As the price increases to a reasonably stable level what opportunities can be taken advantage of? What lands are worth leasing and what prices do we walk away from?

Linking to dividend paying stocks, for all commodity companies they are driven by cash flow. It is easy to get involved with expensive projects when the price is high because the ability to gain financing is relatively easy. The trick is what happens if the price falls and when is cash flow a problem? If you are buying a commodity company how much extra cash flow will they have to meet your shareholder demands as well as running the company?

There are more questions than answers, till the next time – to raising questions.