Critical elements of Operating cash flow in the Commodity based business

Critical elements of Operating cash flow in the Commodity based business

Critical elements of Operating cashflow in Commodity based business

Commodity price is changing every day. This applies to commodities of any type. Commodity markets are easily 20 trillion/year


Energy Commodities — Crude Oil, Heating Oil, Gasoline Coal, Electricity etc.

Metal Commodities — Aluminum, Copper, Gold, Silver, Platinum, Steel etc.

Agriculture Commodities — Barley, Cocoa, Corn, Cotton, Wheat, Sugar etc.

Livestock and Meat Commodities — Feeder Cattle, Live cattle, Pork Belly, Lean hogs etc.

Crude oil commodities are at 1.7 trillion/year alone.

Operating cashflow is linearly proportional to production of the company. For example, if a firm has 1000s of Production Assets or 7 Production Assets, the cashflow basis for each is unique, there are hundreds of variables let's look at a few

Components - example Machines –number, types of machines, age of the machine, run time, efficiency, capacity potential, cost to run it the relationship between the different machines, just because 1 machine productivity is highest, the next one that it is connected might be inefficient and could constrain the productivity of the plants. Thus, optimization of relationships between the different units is key for Operating cashflow

Cashflow unit index - Each Asset has a unique cashflow index. This is a roll up from the cashflow index of different machines. Let's understand the different variables

Changing commodity prices

Let's take a closer look at an example of Production of Crude oil and how the operating cashflow fluctuates. Example a barrel of oil produced today could be valued at $91.91/barrel. Tomorrow it could be $87.02/barrel, the drop is an instant 6.3% drop in operating cash flow. If the firm was making 69,874 barrels of oil/day. Cashflow dropped from $6,422,119.34 to $6,080,435.48, that's a loss of $341,683.86 in Operating cashflow that the firm has 0 control over. What they can control is continuing to product 69,874 barrels of oil/day. Here is where it gets tricky

In commodity-based businesses, the operating cashflow is a directly proportional to the production of the product. Here we will uncover the elements of the commodity Oil.

According to Mckinsey, there is a 200 billion performance gap due to lack of optimization in operations and inefficiencies. 10 million barrels/day is lost due to inability to maximize efficiency of oil and gas operations

Let's take an example of a company producing 69,874 barrels of oil/day sold at market price of $91.909/barrel. It generates Gross operational cashflow of $6,422,119/day.

It's critical to understand that this production can be generated from

Most important aspect to focus on is to understand how each of these wells produce oil.

1. Reservoir pressure correlation to Production of Oil

Reservoir pressure cannot be controlled. It's based on the depth and location. The reservoir pressure needs to be high, so oil can flow from low pressure to high pressure. Its basic engineering principles

Considering the different types of wells

2. Cost of maintaining production of 69,874 barrels/day

The most vital risk that can affect the cash flow of the organizations is that some of the wells can go offline anytime resulting in 0 barrels of oil per day. 

Operational Optimization is the Key and needs to be implemented every day:

It's cheaper to optimize production than drilling new wells. Considering the above-mentioned well cases, if we sell each barrel at $65, all the cases are profitable. Ensuring highest margin along with the low cost is the most important metric that the organization should look for.