By
Nissa
Darbonne
Oil and Gas Investor

[Editor's note: A version of this story appears in the December 2020 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

What’s 2020 like for E&Ps’ heads of investor relations? Fewer analysts are covering E&Ps, they report. And some of those still covering E&Ps are now assigned as well to other energy sectors, including renewables.

On the buyside, hedge funds are walking away for now—understandably, one IR chief said, as money to be made in the E&P space has been trending sideways. Institutional-fund managers want sustainability reports and a slide or more on ESG efforts. And investors are judging E&P returns against the broad industrials space. They don’t want to hear about production growth. They want to hear about growth in returns.

And the virtual-meeting world has come with upside and downside. The upside is that more fund managers can participate due to no travel needed; the downside is the loss of chance meetings at symposia.

Investor visited with four IR heads. Their insight is here with attribution withheld to promote full candor. They represent operators in basins from oil-weighted to gas-weighted and from small caps to large caps. Sellside analysts on their recent quarterly calls range from five to 11.

Investor: Are there fewer sellside E&P analysts these days?

Oil-Weighted Midcap: The sellside community continues to shrink. It’s absolutely the trend. In fact, I just heard of another analyst who was let go. The firm didn’t stop energy research, but it cut the department in half. It’s a continuous process.

We’ve seen a meaningful shift in the amount of coverage across the entire space. It’s usually an analyst or department reallocated to another sector where the bank feels they need to spend more time because they’re probably not doing as much business in the energy space.

We’ve seen a focus on larger names with larger market caps that probably hold more opportunity for trading desks and banking. We’ve seen the dissolution of various groups that simply no longer exist because it wasn’t an area where they could afford to continue to invest. Smaller banks simply went away.

It’s affected us, and I know it’s affected a number of our peers. I think we’re very fortunate to still have a really broad swath of coverage from the energy-focused banks as well as the [larger] banks.

Oil-Weighted Large Cap: E&Ps really run the gamut from a company that can compete on a variety of traditional financial metrics to companies that may have difficulty funding their operations. And this is just the truth of where we are with the industry.

For us, we have not seen the number of analysts who cover us go down. It’s been fairly consistent—around 30 analysts. But you have seen certain banks pull back from the sector a little bit.

Now, the analysts themselves have changed. We’ve seen some seats move around, and you’ve seen banks make a decision to allocate resources a little differently.

But I don’t think the sector as a whole is under-followed or under-brokered. There’s certainly no shortage of analysts that are covering the sector currently.

Oil-Weighted Small Cap: We have the fortunate position of having a really good analyst group—10 or so. We’ve lost one or two over the last two years, but that’s it. We’ve got a pretty strong relationship with analysts because of a pretty long track record.

But I don’t disagree with the fact that the analyst community has shrunk and/or they’re spending more time in other industries. I noticed today that Tudor Pickering [Holt & Co.] started covering two renewables [NextEra Energy Partners LP and Brookfield Renewable Partners LP].

Gas-Weighted Midcap: In general, the industry has fewer sellside and fewer buyside analysts that are focused on energy. You’ve had some energy analysts now covering energy and industrials or renewables or they’re covering other things as opposed to 100% energy.

Investor: Decarbonization-type names?

Gas-Weighted Midcap: Right.

Investor: What’s happening in the buyside?

Oil-Weighted Small Cap: One hedge-fund manager closed his fund down and got a job— not in the oil and gas industry.

Oil-Weighted Midcap: Your long-only money, a lot of that crowd is still around, although they certainly have not been paying as much attention to this sector of late. I think that’s pretty standard across the space. We’ve seen a continued kind of attrition from energy based upon COVID[-19-driven] reduced demand and what that’s done to commodity prices.

Beyond that, we certainly have seen significant shake up in the hedge-fund community, especially the kind of multipod hedge funds. I’m not going to name names, but numerous pods—if not everyone dedicated to E&P research or oilfield services—have pretty much been wiped off the map at certain firms and drastically reduced in others. There’s been a significant change there.

There’s still a number of names around, and there are still people we have met with over the course of the summer and we have upcoming meetings with. But, to put it in perspective, where I used to have three and four different pods from the same fund all requesting a meeting, I don’t even see their names on the request list anymore.

So, certainly, there’s been a reallocation of resources from the hedge-fund perspective as well. And that’s been ongoing.

I don’t think that was purely a function of COVID-19 or the associated economic downturn. I think that is something that we’ve been seeing for a while as they seek out additional ways to try and invest—whether it’s more algorithm-driven or whatever is the new trend that they want to follow.

Some of the traditional fundamental investing seems to have dropped off—at least in the hedge-fund world.

Oil-Weighted Large Cap: The buyside has changed dramatically. And I think that is a direct result of performance being hard to come by over the last couple of years—just given the difficult environment that energy has been in.

Energy shrinking in terms of the percent representation in major indices has certainly added to that. A decade ago, you were in the low teens [in the S&P 500]—maybe a touch higher at its peak. Today you’re at a low-single-digit percentage.

Investor: Has it been less helpful this year that investor meetings are all virtual?

Gas-Weighted Midcap: You can talk to more people. But I don’t know if the message is communicated as well when you’re not in person. You can cast a wider net because there is no travel and we’re finding that people will do a call.

But I don’t find the communication as effective as being in person. That’s just me. [The serendipity], you lose that.

“I do think people will start to turn attention back to the sector. Will it be invested at a level like we saw in the past? That’s hard to answer. If you are an investor, you’re a capital allocator—no different than we are.”
—Oil-Weighted Midcap

Oil-Weighted Small Cap: There are some advantages to virtual, but you hit it on the head: You lose the chance [to get in front of someone that] doesn’t cover us.

You lose the interaction—with investors, potential investors and other companies where, who knows? Maybe a deal comes up or maybe an idea is spurred by what somebody is doing somewhere else. So it’s a lot more difficult virtually.

We do save money [by virtual vs. in person]. But I don’t know that that’s as much a concern as the upside of being able to see folks and what you might glean from that.

The ability to attract investor interest for a small-cap has been increasingly challenging. And on top of that, you’re not having that serendipitous crossing of paths when we’re doing live conferences where we have people sort of “discover” us and see it’s a well-run [company] and want to talk more.

But I will [add] that, over the last 18 months, the number of conferences had gone up and the number of investors didn’t go up with it. You were sort of diluting face-time because you weren’t necessarily seeing the same number of investors. That probably had nothing to do with the number of conferences, but the more apathetic view of energy investors, especially in the small-cap world. The bigger guys, I can’t speak for them, but we’re sort of in a unique situation being in the small-cap world.

Oil-Weighted Large Cap: Yeah. You do get “the hallway crowd” kind of wandering into these events between meetings. It’s certainly something that happens.

But in the virtual world, you also have people [who are unable] to travel [even in good times]. [Virtual] is much easier for a generalist portfolio manager—someone who might have multiple responsibilities across multiple sectors.

It’s much easier for that person to participate in a virtual event than it is for that person to travel, spend a day or two on the road, given the different directions they are pulled in.

So with the virtual event, you do lose some of the positives that go along with being in the same room with someone, but it has allowed for broader participation than we would have seen at a physical conference.

That’s really important in energy where the number of potential investors has shrunk. As you’re trying to attract investors back to the sector, having the ability to reach them in a virtual event can actually be pretty effective.

Investor: Everyone will go back to in person? This isn’t going to be the new normal?

Oil-Weighted Large Cap: The sheer number [of investment symposia] hasn’t changed. If anything, I would say this virtual world has actually allowed for more events.

A number of different banks have used it as an opportunity to host an event because it’s very easy to coordinate a virtual event. You don’t have to worry about hotel rooms and conference venues. It’s easier just to pass along a dial-in number or a video link.

The result is positive. But I think you can have some investor fatigue.

It’s worked out fine in terms of being able to get the story out. But I don’t think anything can ever replace traditional face-to-face meetings. You just simply get a better sense for body language and messaging, being able to sit in a room with someone.

You lose some of the general effectiveness as it relates to an in-person meeting vs. a phone call or video conference. Sometimes you have people speaking over each other.

On the other hand, it can certainly be an effective use of a management team’s time. You don’t lose a day and a half to travel. You’re able to be in the office and remain very productive.

Oil-Weighted Midcap: Virtual meetings will continue to be the norm at least for the reasonable future. But not forever.

There are investors and some people in management who have expressed the desire, when appropriate, to have face-to-face meetings. We want to be in front of people. [It] just needs to be under the right circumstances.

Investor: How much do investors want to talk about ESG?

Oil-Weighted Large Cap: Certainly there’s no shortage of funds that have ESG as a part of their mandate or scorecard. I don’t think that’s going away.

Environmental is one component—and it’s certainly a component that we take very seriously here and certainly view it as part of our core values. We’re at nearly 100% [on] the amount of gas that we capture. Not every company is at that level.

But you have to look at [all of] ESG. It’s about the communities and our employees. Energy companies are vital to the communities they operate in.

 It’s important that this continues to grow as part of the industry’s messaging. It’s important that the American people understand what the industry does for the communities that they operate in.

Oil-Weighted Small Cap: Being a small-cap, we don’t get a whole lot of questions about it. [Our largest investor] has hosted a webinar to talk about ESG, and they definitely have a focus on it because their investors are asking them about sustainability.

So they want to make sure that, at least on the E side, we’re doing the best we can. They definitely are focused on the E side more so than the S and the G.

Oil-Weighted Midcap: Whether it’s exploration and production or refining or midstream, we’re all being held to a higher standard. And there’s nothing wrong with that.

I think we all have to make a contribution to better environmental policies as well as doing what’s best for all of our stakeholders. These are just fundamentally sound business practices that enhance your bottom line when you follow through on those.

It’s something we talk about in investor presentations and in our sustainability report.

Investor: Are the questions around E more than S or G?

Oil-Weighted Midcap: Of E, S and G—and every one of those three letters is important— probably the G held a lot more weight coming into this age because governance has always been a hot topic, and it’s been more of a hot topic in recent years.

But the others are equally important. Companies are going to have to focus on balancing their efforts to improve on all three fronts.

Companies are starting to commit to a greater transparency and, as we kind of pull back the veil and talk about what’s important, it becomes necessary to acknowledge where we can improve and what the path forward is to achieve that.

Investor: What do investors just not want to hear about?

Gas-Weighted Midcap: I think there’s a lot of scar tissue in the industry. I think the message is getting across that there’s a lot more capital discipline. I think the buyside really wants to see it and for an extended period of time before they act on it because they’ve just been burned by it before. I think there is skepticism.

Oil-Weighted Small Cap: I was talking to two different investors over the last couple of days. The view is that, if a money manager misses a [ramp] in energy stocks and all of a sudden [E&P] starts performing, it won’t impact his portfolio because it’s such a small piece of the overall S&P.

A lot of these investors say that we [in E&P] are competing with the industrials and, until we can show a similar cash-flow yield or return on capital and a sustained oil price, there’s not a whole lot of new money for big funds in this space.

Oil-Weighted Midcap: We’ve seen plenty from various research banks and commentary from some of the largest investors about looking at the business through a different lens. This is not about how much you can grow production and how much you can grow EBITDA. It’s “We need to see a sustainable business.”

And when I say that, I’m not really talking about the ESG side of things. It’s about “When are we going to get to the point where we are returning capital to shareholders, bringing our debt levels down, moderating activity so that our reinvestment rate in the business is less than 100% of what we generated the year before?”

Management teams have listened—from the largest companies to the smallest. Growth has not been as significant a portion of the equation—certainly not production growth. What we have seen is management teams focusing on delevering, managing their cost and looking for opportunities to create sustainable returns of capital to shareholders.

I think it was making headway with investors before [2020].

Obviously, [the COVID-19-driven economic downturn] hurts. Our industry is not the only one that has suffered, but I think it’s endured surprisingly well, given the massive drop-off in [oil] demand.

[Fund managers] are consistently being held to the standard of “Why are you allocating investible funds into one sector or another, given near-term and longer-term fundamentals?”

“A lot of these investors say that we [in E&P] are competing with the industrials and, until we can show a similar cash-flow yield or return on capital and a sustained oil price, there’s not a whole lot of new money for big funds in this space.”
—Oil-Weighted Small Cap

Investor: Will they come back to E&P?

Oil-Weighted Midcap: I do think people will start to turn attention back to the sector. Will it be invested at a level like we saw in the past? That’s hard to answer. If you are an investor, you’re a capital allocator—no different than we are.

So they’re going to look at the various opportunities they have, and they’re going to decide where they think the best returns are. And there will be points in time where, hopefully, we shine, and [there will] probably be points in time, much like now, they’d see better opportunities elsewhere.

Oil-Weighted Large Cap: It’s probably pretty specific from investor to investor. But [our company] has an ability to compete on traditional financial metrics, going back years. [We didn’t do] “growth at any cost.”

Sectors like industrials and healthcare have taken investor dollars away from energy for years. It’s very important to be able to compete on financial metrics that can be applied not only to energy but to other industries as well.

That’s how you’re going to attract investors and bring them back to a sector that’s vital to our national security, vital to all of our livelihoods and provides a secure and reliable lowcost energy solution for Americans.

Investor: It’s curious that oil and gas are discounted in the stock market when no other industry would exist without them.

Oil-Weighted Midcap: It’s certainly not reflected in the current benchmark. But if you think about your own investments, would you want to invest in a space that you thought was currently in turmoil when you could wait, let that turmoil subside and get a better long-term picture of the fundamentals behind that sector?

I think that’s really what it is: People need to know. When you’ve got political upheaval, the possibility of changing [energy] policy, a supply and demand equation that doesn’t really make sense near-term, those things all have to work themselves out.

I think investors want normalcy. They want something that they can actually put in their model and get a reliable answer.

And if they can’t, I think they’re going to err on the side of conservatism rather than go looking for the long shot.