Cash (flow) is king. House rich, cash poor. Money doesn’t buy happiness but it sure keeps the kids close. F.U Money. I bet you didn’t know it, but all these phrases were originally said by an accountant (an unusually flamboyant one, mind you).

As we discussed yesterday, net income is an imaginary number that is the net result of all the revenue and expenses- both cash and non cash. And these items manage the flow on the balance sheet. However, it is the cash flow statement that is the “one ring to rule them all”. It starts with net income and adds back all the non cash events – DDA, (gains)/losses, and ends up with the cash your business generated.

It is a simple equation:

CF(operating) + CF(investing) + CF(financing)= Change in cash.

For O&G companies- this is all that matters. How much came from from ops, how much went back in the ground and what was the extra used for (or come from). Valuation wise- if you have to spend 100% of operating cash flow to keep production flat… how do you pay down your debt?

Like the housing crisis of ‘08, homeowners were fine as long as they could refinance at low interest rates.. but when the wall of debt comes due and interest goes to 10%… what happens then?

Tomorrow. We put it together to value your company.