New Report on E&P Valuations from RJ - Jan 16

[dan_s]

Note from Raymone James: Exploration and Production
What Metrics Drive Stock Performance and Will the E&P Valuation Gap Close?

Back in 2018, we highlighted a fundamental shift occurring in the E&P industry — operators committing to living within their cash flow, i.e., spending less than they were generating. While an impressive goal, talk is cheap, especially considering E&Ps lengthy track record of capital (mis)management, and investors wanted results. Fast-forward to 2021 — not only have E&Ps kept their word, they surpassed all expectations. Reinvestment rates, currently at historic lows, have led to record profitability. E&P free cash flow yields, something unknown to the sector just 5 years ago, are now the highest in the market. Even shareholder returns, previously thought to be extinct in the E&P sector, are commonplace among nearly every company within our coverage (via buybacks and dividends).

Speaking of returns, 2021 served as a renaissance of sorts for the E&P industry. Following a battered and bruised 2020, with many operators fighting for survival, 2021 brought record performance with Raymond James’ E&P coverage up an astounding ~117% last year. To put this into perspective, our coverage outperformed the S&P 4.5 times over — in fact, every single E&P under coverage beat the S&P in 2021. And yes, while oil’s meteoric rise (up 73% y/y) can be attributed to the lion’s share of positive momentum, not all operators fared equally. Specifically, several names within our coverage (LPI, AR and MTDR) crested the 200% return threshold, with SM, up 384% reigning supreme. However, despite an incredible 2021 run, E&Ps (as a whole) lag nearly every other S&P sector on a valuation basis. Additionally, E&P valuations actually trail pre-COVID levels! So, the question undoubtedly remains — why have E&P valuations decreased despite the industry’s investor-friendly transformation? In today’s energy stat, we take a deep dive into E&P valuations, looking at 1) E&P valuations over time and how they compare to other sectors, 2) metrics correlating to E&P outperformance (and vice versa) and 3) how cash flow growth and rising E&P distributions might affect stock performance in FY22 (and beyond).

Send me an email (dmsteffens@comcast.net) if you'd like to read the full RJ report.