RBC Capital - Notes about upstream sector - Jan 2

[dan_s]

US E&P Comps: Ready to Be Over but Barely Started
Weekly Valuation Update: February 2, 2023

Our view: Energy stocks are struggling in the early innings of earnings. So far results are not overly
impressive but not that bad either. The equities are seemingly being pulled down by crude weakness
and enthusiasm in other parts of the market. We have taken notice of SMid cap interest and so far
those appear to be the YTD winners, but notably still trade at a decent valuation disconnect to larger
producers. Last week, oil-weighted E&Ps traded down 7.4%, while gassier peers fell just 3.0%. Large caps
were down 7.3%, underperforming SMid cap peers again, which were down 5.8%%. Overall the XOP fell
6.8% while WTI oil traded down 6.3% and HH natural slide again down 13.8%.

Investor Sentiment: Investors now seem more focused on macro questions versus getting interested
in the equities. It seems to us like interest for now has waned and a soft start to earnings is making
some investors derisk into the heart of earnings for energy companies. Most US E&Ps report mid-to-late
February, leaving plenty of time to take stock in what might transpire. There is some comfort in a higher
support level for oil prices because investor discipline appears very well intact. Gas equities remain a
topical conversation, and it seems like there is real interest to build positions at this time.

Recent Reports of Interest: Our commodity strategist team provided their insight on the OPEC JMMC
meeting. OPEC is content to stay the course on the 2 MMb/d production cut and there were no
recommendations for a policy shift at this time. OPEC seems comfortable to wait for key policy
developments to evolve, the pace of the China reopening, the February 5 EU ban on Russian products
imports, and the trajectory of Iranian oil exports. < In other words, lots of "noise" to consider.