For months now, the traditional relationship between commodity price moves and energy equities has defied logic and expectations. Even as the industry rejoiced that oil prices had doubled and cash flows were strengthening, it watched with chagrin as most of the oil and gas stocks failed to come close to matching that performance. The disconnect was especially pronounced in the exploration and production sector. Institutional and retail investors found it far easier, and much more exciting, to focus on sexy high-tech and Internet-related stocks that kept delivering eye-popping gains. What can be done? Certainly it would be difficult for the industry to change the mentality of momentum players, or to mollify those investors who were scorched by the E&P stock price crash of 1998 and 1999. But a realistic goal for many companies is to see their stock trade at a valuation in the upper quartile of their peer group. Other reasons to renew the focus on, or devote greater resources to, investor relations include the need to introduce new executives or changed strategies to the financial community; attract additional investors in major markets outside New York, such as in Boston or Los Angeles; or explain a turnaround in progress. In any case, a return to basics-solid financial performance and conservative earnings projections-must be coupled with a strong and focused investor relations campaign. Premium valuation becomes achievable when a company does four things well: 1. Implement strategy The IR program must give the financial community confidence that management can achieve its goals and strategies. The means and methods must be carefully articulated. 2. Deliver strong performance The IR program must instill confidence that management will continue to achieve superior financial and operating results at the wellhead and in the office. 3. Communicate and educate The IR team must develop an innovative and proactive communications program that conveys meaningful financial and operating information. 4. Create management credibility The IR team must make sure the financial community perceives management is committed to creation of stock value, and is credible. It is important to excel in these four areas, as they drive perceptions, and perceptions drive stock performance. IR managers should regularly obtain investor feedback in these areas to understand how well their company stacks up against top-quartile peers. Tactics may vary from company to company, but the valuation drivers are constant. One of the E&P firms with the most formidable communications arsenal is Anadarko Petroleum Co., singled out in 1999 by the National Investor Relations Institute (NIRI) and Investor Relations magazine for overall IR program excellence in its market cap category. We asked Steve Campbell, Anadarko's manager of investor relations at the time, for examples of what sets the Houston company's well-regarded program apart. (Campbell has since joined Newfield Exploration Co. in the same role.) The period on which the NIRI award was judged was late 1998-early 1999 when oil was selling at $10 a barrel, so the program was put to a rigorous test. "During the low commodity price environment, we were very active in communicating our views on the macro environment," Campbell says. "The focus of our investor relations shifted away from a company-specific presentation to a macro-view of the industry. Analysts and shareholders wanted to know how Anadarko was positioned to weather the cycle of low prices, and, more importantly, how we would continue to add shareholder value through that difficult period." To present its views on global and domestic oil and gas markets, the marketing department developed a historical look at prices, drilling activity and E&P capital budgets. Executives hit the road with a presentation that had news value and addressed the issues the Street wanted to talk about. This set the company apart from other companies and got it some favorable press. In addition, Anadarko probed the vital element of direct contact with the investment community- analysts and portfolio managers-by conferencing, meetings and field trips. Conference presentations combined substance with state-of-the art graphics, animation, quality photography and video to create an understanding of Anadarko's operations, and on a macro level, 3-D seismic and subsalt challenges. These gave shareholders and potential shareholders the relevant information they needed. To be effective, Campbell says, it's essential that meetings address topics the Street is interested in - this could be industry-related or company specific. Anadarko uses a combination of large hotel-style update meetings, one-on-one meetings, dinners and other methods. It uses a range of management team members to make presentations. "Investors like to see the depth and quality of your management, and it adds expertise and interest to your presentations," he notes. Field trips are a high-impact ingredient in Anadarko's IR program, enabling analysts and shareholders to see company operations first-hand. On-site inspections range from the sands of the Sahara Desert to the plains of southwest Kansas to the Gulf of Mexico. Field trip participants return with a broader understanding of the variety of operational areas and unique challenges being faced. In Algeria, for example, the company has taken several groups of 10-12 analysts to tour its giant oil fields, in an area where sand dunes tower more than 1,500 feet above the desert floor and temperatures soar above 100 degrees. This has all the makings of a fascinating and informative field trip. Anadarko's IR goals are stated this way: "To communicate the financial and operational results of the company; to outline plans moving forward, and the importance of these plans to company objectives; to serve as a solid, knowledgeable, trustworthy and factual information source for shareholders and analysts." Edd Grigsby, investor relations vice president at Phillips Petroleum Co., but based in the financial community heartland of New York City, frequently receives calls from people new to the IR field seeking pointers on how to do their job. He offered a recent caller what he characterizes as a "three-legged stool" of wisdom: Know who the analysts are that should be following your company, maintain contact with both the sell-side and buy-side (and with the same frequency in good times and bad), and get your top executives in front of the investment community on a regular basis. "Regardless of your strategy, your arsenal of tactical tools or the current investment environment, you need to adhere to the basics," he advises. Non-U.S. companies trying to establish strong ownership in the United States face special IR challenges in expanding their foothold. Petro-Canada, the Calgary-based integrated oil and gas company, is a current example. Flagship properties include the high profile Hibernia and Terra Nova oil fields offshore Newfoundland. The company is one of the largest natural gas producers in Canada, at over 700 million cubic feet per day. Its 1,800 service stations display their brand all along the nation's highways and byways. Says IR manager Fred Kerr: "We have established widespread sell-side analyst support in the U.S., but we have a lot of room to build institutional ownership south of the 49th parallel." Kerr and corporate management face the fact that U.S. institutions have many petroleum industry names from which to choose. "We need to be sure buyers of oil and gas stocks are at least aware Petro-Canada exists, then build understanding of our story in hopes of eventual purchase decisions." Kerr's IR department diligently does its homework, working with analysts and conducting extensive research on the Internet to develop and maintain a prospect profile database. The group: • Identifies funds and portfolios that already buy Canadian oil and gas securities, • Learns the focus of each - cash flow or earnings-based return on capital employed, • Tracks purchases of peer stocks, • Understands minimum performance levels expected, • Creates awareness of Petro-Canada, and • Determines existing perceptions, positive and negative, of the company. Petro-Canada has concentrated the bulk of its IR effort in Boston and New York, holding three or four meetings a year with analysts and portfolio managers there. Corporate executives also have visited other financial centers including Denver, Los Angeles, Houston, San Antonio, New Orleans and St. Louis. Once a year they meet with shareholders in London and elsewhere in Europe. Kerr's IR goals include adding two or three analysts every year who currently follow the company's peers, but not Petro-Canada itself. "We have most of the major firms covering us already, but could add a few new national firms, some regional brokers and energy boutiques," he explains. "Non-Canadian ownership today is 20%. Our objective is to double that." The message being communicated to the investment community by Cabot Oil & Gas is more particular, because the Houston company has been repositioned as a better-balanced domestic E&P company. "We are no longer the Appalachian and Midcontinent production company that went public in 1990," explains president and CEO Ray Seegmiller, who rang the opening bell at the New York Stock Exchange on January 10, 2000, as part of the year-long celebration for the discovery of Spindletop. "Cabot has been a contrarian in that when natural gas prices were good in 1996 and 1997, we were high-grading our asset base by selling off low-return properties. When gas prices turned down we started acquiring assets, primarily on the Gulf Coast, with exploration upside. This acquisition/divest strategy is only successful if a company has a good drilling track record. We have replaced our reserves primarily through the drill bit in eight out of the last nine years." In presentations made recently to analysts in Boston, New York and Midwest financial centers, Seegmiller related the strategy upon which the company's future is based: • Grow through the drill bit rather than relying solely on acquisitions. • Continue to make synergistic acquisitions with upside potential. • Capitalize on the company's marketing expertise to provide $4-5 million in brokerage profits each year. "We stick with our fundamental strategy, but adapt to market conditions while keeping the investment community abreast of our progress," Seegmiller says. Union Pacific Resources faced an entirely different IR challenge in the last two years. David Larson became investor relations director at UPR early in 1998 when the company's stock was trading around $23 per share. Going into 1999 it had dropped to $9. During the darkest days, UPR focused on maintaining its investment base: shareholders who understood the commodity business and were willing to tough it out. "Our completed asset sales program allowed us to de-lever," Larson says, "and rising commodity prices have improved our business outlook overall. We have returned to the basics of growth through the drill bit. All of those factors have helped to strengthen our balance sheet. "While 1999 was a turning-the-corner year, we believe we're still undervalued versus our peers, and that's the news we deliver to investors," he says. "We're doing more marketing today-re-telling our story-to attract new shareholders." Larson says the company has learned from experience the importance of sticking with a strong IR program. "The worse things get, the more vital it is to communicate," he asserts. "And the better they get, the more you need to avoid complacency." At Texaco, one part of the IR program has been to deflect speculation about mega mergers among the biggest oil companies, and keep shareholders loyal to Texaco. "You must be very direct in showing how your corporate plans and strategies will lead to better returns in your business, and therefore, higher shareholder value," advises Elizabeth Smith, vice president, investor relations, at headquarters in White Plains, New York. "That's basic 101, but today investors are more sophisticated in the information they request. We're doing everything we can to respond." Asked whether during periods of stress (i.e., depressed crude oil prices) a company needs to intensify communication with the investment community, she emphasizes, "Our IR program is always intense." She notes that holders of large numbers of shares want reassurance that management is maintaining its commitment to business strategies. "Communication is critical, and at Texaco we're always seeking to broaden our range of contact, such as by using electronic technology to report key financial and business data." Jeff Christensen is executive vice president of Christensen & Associates, overseeing the company's Stamford, Connecticut, office. He has been with C&A, an investor relations consultant, since 1986. Earlier in his career, he provided audit and management consulting to clients at Arthur Andersen & Co. He is an honors graduate of Western Michigan University where he earned a bachelor's degree in accounting. C&A conducts IR perception research, investment meetings and targeting, executive training and IR program design.