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DALLAS—It’s no secret financial markets, both equity and credit, have been off-turned to the oil and gas business in recent years. Returns drive investors and there are things managements can do to encourage the public to give energy a second look, a panel of industry analysts told attendees at Hart Energy’s Energy Capital Conference on March 5.
“There’s no doubt that there’s a shift, and I don't think it’s a temper tantrum,” said Rob Anderson, managing director with Jefferies’ energy investment banking team. But energy isn’t the only sector that has been shunned in recent years, he added.
“I think it's really important to point out that this isn’t probably solely oriented towards the energy sector. I think it’s broader based, I think the entire capital markets are changing and I think this desire for free cash flow and return of capital to shareholders is something that’s being driven across all industries. It’s obviously very heightened here and I think should be expected,” he said.
Doug Reynolds, managing director and head of U.S. business for Scotia Waterous, said he “completely agrees” with Anderson’s point.
“We have had a technology change in the industry that is historic, it’s every bit as historic and dramatic as the tech boom,” Reynolds said. “And if you remember the tech boom in the late ’90s, everybody was concerned that these companies were burning cash.”
So what do investors want?
“When people ask me ‘Is it free cash flow or growth?’ the answer is obviously ‘both,’” he added. “There are companies that are currently in the penthouse—and there are some in the outhouse, that are experiencing a discounted valuation. But those premium guys are folks that can deliver free cash flow and growth. I think that’s the business going forward.”
Shawn Reynolds, portfolio manager for VanEck’s Global Hard Assets Strategy, said he works with management teams to emphasize they need to “make yourself relevant because the way that it has been going, you weren’t really delivering anything financially. Operationally, fantastic results!” But investors want something back for their money.
“However financially, [E&P] wasn’t really delivering anything that the market wanted long term. I always reflect that it’s not so much that people like me or other funds my size invest in the space—the Wellingtons, Fidelitys, the T. Rowes of the world are here. Are they going to be investing in energy?” he said. Yes, they are. But what’s important is “the amount of capital that we get—and that capital comes from the investor who’s standing behind me, the big insurance company, the big pension fund, the endowment, the foundation, the hospital network—whatever. They invest in us as part of their broad portfolio of diversified industries and sub asset classes.”
Investors’ perception that energy offers weak returns has jammed the IPO market with hopeful, private equity-backed firms, and that’s not likely to change soon, the panelists warned.
Executives need to realize that impressive reserve additions, acreage acquisitions or other operational statistics don’t impress investors, the panelists emphasized. Financial returns, they said, draw interest. “The land grabbing is done,” Shawn Reynolds added. Now, investors want to know what drillers will do with that land?
“Companies are trying to become, public companies are trying to become, free cash flow-positive with lower breakevens, and they’re trying to deliver growth,” Doug Reynolds said.
“An asset that enables a company to get better on that kind of scorecard, to fit more into what investors are looking for, is clearly an asset that’s attractive,” he added. Energy has to compete with the returns in other investment sectors to draw the capital it needs. “That’s perhaps different than it was three, four years ago. But a free cash-flowing asset is well articulated— I think is something that’s very much in the sights” of investors.
That will thaw the big chill, Shawn Reynolds said, but the industry still must look ahead.
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