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Energy Stat of the Week by Pavel Molchanov

Energy Stat: Can U.S. E&Ps Beat Broader Market Returns (FCF + Growth) over the Next Few Years?

March 18, 2019

Recently, we published an E&P deep dive report to answer the question ‘How Should E&Ps Balance Growth with Free Cash Flow?’ as well as introduce a dynamic, proprietary new E&P screening tool to assist clients in their investment process. This E&P screening tool allows us to quickly run countless scenarios for individual operators vs. previous competitor attempts that focus on a few static assumptions. In this week’s Stat, we discuss highlights from our report (the results of which were generated using the new screening tool) and examine the outlook for overall industry E&P returns (free cash flows plus growth) over the next several years relative to expected broader market returns. Energy investors have made it very clear that a healthy combination of FCF and growth, and more broadly a focus on capital discipline, is a long term trend needed to bring investors (most notably generalists) back into the energy space (and back into E&P stocks in particular). This was made abundantly clear in last week’s Stat, which recapped survey results from our Energy Dinner at the 40th Annual Raymond James Institutional Investor Conference, in which ~50% of those polled indicated that having FCF and growth above that of the broader market, coupled with capital prudence, is the number one driver to compel further investment in energy in 2019.