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How Much Further Can BHP Billiton plc, Genel Energy plc, John Wood Group plc & Amec Foster Wheeler plc Fall?

Strong balance sheet

Shares in BHP Billiton (LSE: BLT) currently carry a tempting dividend yield of 7.1%. But falling commodity prices, particularly with oil and iron ore, should mean BHP would face a shortfall in free cash flow to fund its dividends. Analysts at Liberium expect BHP will have a $3.7 billion cash flow shortfall in 2016, unless it acts more quickly to cut its capital spending plans.

Although BHP’s strong balance sheet means it can easily raise debt to fund its cash flow shortfall for at least the next few years, it is not sustainable in the long run. With expectations increasingly supporting the ‘lower for longer’ outlook for commodity prices, BHP could be forced to cut its dividend to prioritise its capital spending needs and preserving its investment grade credit rating. As the dividend yield has acted as support to shares in BHP, renewed uncertainty about the sustainability of its dividend policy could send its share price even lower.

Collapse in operating cash flows

Genel Energy (LSE: GENL), which focuses on the Kurdistan region of Iraq, has been hit hard by the collapse in the oil price, despite it being a low-cost producer. Its total cost breakeven price is around $30 per barrel of oil, which should mean that it would be able to remain relatively profitable in the low oil price environment.

But a collapse in its operating cash flow is worrying. Operating cash flow fell to nil in the first half of 2015, as the Kurdistan Regional Government delayed payments worth up to $378 million for oil produced by Genel and sold by the regional government.

Genel’s financial position is secure for now, as net debt was just $216 million at the end of June. The oil producer has nearly half a billion dollars in cash, which means its capital spending needs for new developments in the next twelve months should be fully funded even if cash flows continue to remain low. After that, its future is much more uncertain.

If the resumption of regular payments from the Kurdistan Regional Government does not materialise soon, shares in Genel could have much further to fall.

Not just oil producers

Lower commodity prices are not just affecting miners and oil & gas producers. Oilfield service companies and engineering contractors to the oil & gas industry have also been badly affected. John Wood Group (LSE: WG) saw revenues fall 19.3% to $3.07 billion in the first half of 2015.

Wood Group is making some progress on the cost side of the business, having seen its EBITA margin improve to 7.4%, from 6.5% last year. Although this is having a positive impact to earnings, it does not go far enough to offset the impact of reduced oil drilling activity in the North Sea, where Wood Group is heavily exposed to. With much of the tumble in its earnings mostly outside of Wood Group’s control, management has little control over the situation.

Analysts currently expect underlying EPS for the full year to decline by just 5% to 51.6 pence, but things could get much worse if Wood Group fails to secure enough new contracts in the following year.

Diversification

Shares in Amec Foster Wheeler (LSE: AMFW) currently have a forward P/E of 11.0. Amec is in a better position to weather the downturn in the commodities cycle, as it benefits from greater diversification. In addition to the oil and gas sector, AMEC provides construction and project management services to the clean energy, infrastructure & environmental sectors.

Although further project delays in its infrastructure and renewables businesses could send shares in the company lower, the likelihood of this happening is small. Expectations for Amec’s earnings are low, with analysts predicting underlying EPS will fall 11% in 2015. And as expectations are so low, investors are less likely to be disappointed.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.