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By Bloomberg

A pair of unlikely standouts in Asia are better positioned than the super-majors and many national oil companies to survive the current oil price downturn, and even thrive from it.

On the key measure of how much cash they generate and retain, Perth-based Woodside Petroleum Ltd. and Oil & Natural Gas Corp. of New Delhi lead the 75 companies in the Bloomberg World Oil & Gas Index on a relative basis. That free cash flow gives them the flexibility to bolster balance sheets, keep shareholders happy, or snap up assets on the cheap.

Among the measures used to gauge protection from falling prices, free cash flow is “the most sensible starting point,” according to James Hubbard, an analyst at Macquarie Group Ltd. in Hong Kong.

“Companies that benefit the most in this environment are the ones that have good operating as well as financial flexibility,” said Buddhika Piyasena, a senior director at Fitch Ratings in Singapore. “Strong cash balances give the opportunity to pick up attractive M&A opportunities.”

Should Brent crude stay at about $50 this year, the industry would need to slash spending by almost half to maintain current debt levels, according to Fraser McKay, an analyst at energy consulting firm Wood Mackenzie Ltd. in Houston.

Bargains

Woodside, Australia’s second-largest oil and gas producer, has a free-cash-flow margin of 44 percent, while ONGC, India’s biggest explorer, has a margin of 24 percent, according to the data compiled by Bloomberg. That compares with 2.9 percent at Exxon Mobil Corp. and 1 percent at ConocoPhillips.

Free-cash-flow yield, a measure of how much cash from operations a business generates relative to its share price, is another way to compare producers, Hubbard said. By that measure, Woodside and ONGC rank behind only OAO Rosneft, Valero Energy Corp. and OAO Tatneft.

Even after its $2.75 billion purchase last month of Apache Corp. assets, Woodside has a more conservative balance sheet than Australian competitors Santos Ltd. and Oil Search Ltd., said Nik Burns, a Melbourne-based analyst at UBS AG.

Woodside’s Pluto gas project in Western Australia started exports to Asia in 2012, bringing in significant amounts of cash. The company also scrapped a deal last year to buy a stake in Israel’s Leviathan gas development for as much as $2.6 billion, while its $2.7 billion plan to buy back stock from Royal Dutch Shell Plc was blocked by shareholders.

Low Debt

That could put the company in a prime position to pursue further deals as the largest producers cut spending. Woodside is expanding overseas as growth plans at home face delays and said last year it’s looking for investments of about $5 billion.

“The competition for assets isn’t as great as it was 12 months ago,” Burns said. “When the time’s right, Woodside might find it’s one of just a handful of companies pursuing acquisitions, and might be able to pick up some bargains.”

ONGC and Woodside won’t get through the slump unscathed.

The Australian company signaled spending cuts and announced as much as $400 million of writedowns. A rapid drop in oil means Woodside’s future earnings and dividends will be considerably lower than last year, according to a UBS report.

Woodside dropped 5.6 percent to A$32.25 in Sydney today, the lowest level in 2 ½ years. JPMorgan Chase & Co. analysts in a report predicted that a smaller dividend will erode the value of the shares and lowered their rating to underweight from neutral.

Still, its spending commitments are low and it has a “huge amount of optionality in its balance sheet,” Chief Executive Officer Peter Coleman told analysts last month. Woodside said in August it had $2.7 billion in cash, compared with its market value today of about A$27 billion ($22 billion).

Gas Prices

ONGC, with about $4 billion in cash, is benefiting from higher domestic gas prices. It expects oil prices to stay near current levels for the next 10 months, giving the company its best opportunity to buy assets, Narendra Kumar Verma, managing director of its overseas unit, said this month. Explorers with debt-laden balance sheets will be likely targets.

“Our balance sheet is pretty strong because we don’t have any debt at the company, though we have some at the group level,” Aloke Kumar Banerjee, ONGC’s New Delhi-based finance director, said in a Jan. 15 phone interview. “The recent hike in gas prices in India is also increasing our cash flow.”

India’s government raised natural gas tariffs 34 percent in October. The government also is expected to reduce the discounts that state-controlled ONGC and Oil India Ltd. have to provide to refiners, improving their cash margins under low oil prices, a Fitch report this month showed.

ONGC gained as much as 1.2 percent to 351.50 rupees and traded at 348.85 rupees as of 11:12 a.m. in Mumbai. The stock has risen 21 percent in the past 12 months through yesterday, while Woodside has declined 13 percent and the Bloomberg oil index dropped 15 percent.

In Asia, Thailand’s PTT Pcl and Malaysia’s Petroliam Nasional Bhd., focusing on natural gas, are in better shape than rivals that produce more oil, Fitch’s Piyasena said.

Exxon Protection

Cash flow margins are only one measure, with McKay of Wood Mackenzie saying the producers that will fare the best are ones that have done the most hedging. They are the companies “that can live within cash flow and still provide growth,” and the largest oil producers with strong balance sheets, he said.

“You can be negative free cash flow, but if you’ve got a strong balance sheet -- the balance sheet of an Exxon -- then you can withstand this situation three, four, five years,” according to Hubbard, the Macquarie analyst.

PetroChina Co. has a balance sheet that could withstand even $60 a barrel for several years “with no stress,” according to a Jan. 12 Macquarie report.

At the bottom of the list of oil producers on a relative cash flow basis are companies such as Santos, which is under pressure before the scheduled start up later this year of its $18.5 billion Gladstone liquefied natural gas project. The Adelaide-based company’s net debt is forecast to peak at about A$7.6 billion this year, UBS estimated.

“Santos finds itself with considerable debt just ahead of the startup of the GLNG project,” the analyst Burns said. “Investors have been waiting for the wall of cash to arrive from the completion of the major LNG investments that have occurred over the last few years, but the size of that wall is rapidly diminishing” as oil prices drop, he said.