11

The Times They are a Changin’

Energy Capital Markets: A Sector in Transition IPAA, June 2019

22

Agenda

Taking Stock A mid-year review of the energy capital markets

Valuation & FundamentalsWhy is deep value money still on the sidelines?

Looking Ahead: 2020-2021What macro & sector developments can we expect?

ConclusionHow to craft a winning strategy

33

Taking StockWhat can we learn from recent

market performance?

44

5% 0.46% 0.32%

(3%)(6%)

(11%)(15%) (15%) (17%)

(21%)

Healthcare Utilities Cons. Disc. Technology Real Estate Cons. Staples Financials Industrial Materials Energy

2018 Equity Sector Performance

Most sectors have mean reverted from last year, but Energy continues to underperform

26% 23%

21% 19% 19%

16% 15% 15% 14%

9% 8%

Technology Real Estate Cons. Disc. Industrial Comm.Svcs.

Cons.Staples

Utilities Financials Materials Energy Healthcare

2019 YTD Equity Sector Performance

Source: Eikon. 2019 YTD based upon data as of 6/19/2019

55

E&Ps vs. Oil Prices YTD

90

102

114

126

138

150

E&Ps Continue to Lag Oil Prices

XOP WTI Oil Price

XOP -2%

Source: Eikon. 2019 YTD based upon data as of 6/19/2019

WTI +18%

66

14% 7% 6%

2%

(10%) (12%)(19%)

(26%) (27%)(32%)

Utilities Healthcare Real Estate Cons. Staples Cons. Disc. Technology Industrial Energy Materials Financials

2018 Fund Flows by Sector

Investors Continue to Withdraw $ from Energy Funds

Source: Lipper. 2019 Fund Flows based upon data as of 6/12/19

91%

18% 14% 14% 12% 7% 3%

(3%) (5%)(13%) (17%)

Comm. Svcs. Technology Real Estate Cons. Disc. Cons.Staples

Utilities Financials Healthcare Industrial Materials Energy

2019 Fund Flows by Sector

77 2019 YTD Energy Performance by Segment

Source: Eikon. 2019 YTD based upon data as of 6/19/2019

18%

13% 11%

10%

6%

(0.22%)(3%)

(22%) (22%)

Midstream C-Corps

MLPs Large E&Ps Integrateds Mineral/Royalty Refiners Services Small-Mid E&P Frac Sands

Defensive, High Yielding Segments Outperform Higher Beta Segments

Avg Equity Performance Per Basket of Stocks

88

Valuation & FundamentalsWhy aren’t investors more excited about

the energy sector?

99

Sector Breakdown of S&P 500 by Market Cap

0%

7%

14%

21%

28%

35%

InformationTechnology

Financials Health Care ConsumerDiscretionary

Industrials ConsumerStaples

Energy Utilities Materials TelcoServices

While Energy's Absolute Market Cap Has Gone Up, the Sector's Relative Weighting Has Lost Share To Technology Over Past Decade

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Energy dropped 60% in Relative Market Cap Weighting - from 13% to 5%

1010

13%

10% 10%

14%

7%

5%

3%3% 3%

10%

21%

19%

12%

10%

15%

7%

5%

2% 3%1%

8%

18%

0%

5%

10%

15%

20%

25%

Financials CommunicationServices

Industrials Health Care ConsumerStaples

Energy Materials Utilities Real Estate ConsumerDiscretionary

InformationTechnology

Energy has 5% stock value relative to 5% earnings contribution, suggesting the sector is fairly-valued

Market Cap Weight EPS Next 12 Months Weight

S&P 500 Sector View: Market Cap Weightings vs. Percentage of Earnings

Source: FactSet June 2019

1111 Energy Returns Have Improved But Still Lag Other Sectors

Source: FactSet. 2019 ROCE Estimates based upon data as of 6/12/2019

19%

15%13% 13% 12%

6% 5%

18%15%

12%14%

11%

6% 6%

16% 15%14% 12% 12%

6% 5%

ConsumerDiscretionary

Industrials InformationTechnology

Materials Health Care Utilities Energy

201720182019E

S&P Mid-Cap ROCE by Sector

ROCE = EBIT / (Total Assets - Current Liabilities)

19% 19%16%

11%14%

20%

5% 6%

23%20%

17%

12%

16%

19%

9%

5%

23%

18%17%

12%

16%

19%

9%

6%

InformationTechnology

ConsumerDiscretionary

Industrials CommunicationServices

Health Care ConsumerStaples

Energy Utilities

201720182019E

S&P 500 ROCE by Sector

ROCE = EBIT / (Total Assets - Current Liabilities)

1212 Refiners Continue To Outpace All Other Energy Sub-sectors In Returns

8.8%8.1%

5.7%6.1%

2.4%3.2%

4.0%

1.8%

12.7%

10.1%9.9%

8.7%9.3%

6.5%

7.8%

0.1%

11.8%

9.9% 9.6%

7.6% 7.5% 7.5%6.9%

6.1%

0%

2%

4%

6%

8%

10%

12%

14%

Refiner Midstream Integrateds E&P - Mid E&P - Large Services - Large E&P - Small Services -Mid/Small

Return on Capital Employed By Energy Sub-Sector

2017 2018 2019 Est. ROCE = EBIT / (Total Assets - Current Liabilities)

Source: FactSet April 2019. ROCE Estimates based upon data as of June, 2019

1313

Looking AheadWhat Macro & Sector Developments

Can We Expect in 2020 – 2021?

1414 Macro Challenges – Part IShifting Market Landscape

Regulation on Corporate Access:Contraction of Sell-Side

Increased Dominance of ETFs and Index Funds

Unbundling of research & trading

Small & Mid-Caps to receive less research coverage

Decrease in conference & meeting quality

International marketing particularly difficult

Issuers will need to set up their own investor meetings

Passive assets are poised to surpassactively managed assets in the U.S. in2021

Passive assets already hold 35% of S&P500

Hard to make nuances of yourinvestment thesis matter in a market withless discretionary capital

1515 Macro Challenges – Part IILess Exclusive Focus On Energy

Increased Importance of “Generalist Investors”

Analysts are covering multiple unrelated sectors

Issuers should simplify investment thesis

Competition for capital versus other sectors

More direct engagement with investors

Less reliance on banks as intermediaries

1616

Sector Themes in 2020-2021

• Peak Oil Demand Fears• Saudi Aramco IPO • Trade War

Tailwinds

• IMO 2020• Improved Financial Results• Consolidation• Shareholder Activism

Headwinds

• Oil Prices• 2020 Election

Wildcards

1717

M&A: A Necessary Catalyst to Excite Investors But Impediments to Deal Consummation Still Exist

(53%)(51%)

(37%)(35%)

(25%)

(4%)

ECA CHK XEC CXO OXY FANG

E&P Equity Performance Post Acquisition Date Through 6/19/19: Markets Have Penalized Companies for Buying Other Public Companies

Source: Eikon

1818 Increased Focus on Environmental, Social & Governance (ESG) Investing:

1919

Index Long-Only Activist/Hedge Fund

Investors Across All Strategies Are Focusing On ESG• No longer just a European or small pension fund phenomenon• Part of US mainstream approach to risk management

2020

Sustainable Investing Rarely Implies Divesting:Being Best in Class within Oil & Gas Can Help Issuers Attract New Money

institutional assets are invested sustainably

$1 of Every $4institutional assets are invested

sustainably

$23T

2121 The “G” is the Most Important Part of ESG: Top Governance Priorities for Investors

Board Composition, with a particular focus on enhanced diversity

Board-level expertise that is more aligned with business goals

Increased attention to climate risk and the environment

Enhanced attention to talent and human capital management

Compensation that is more aligned with performance and strategy

1

4

3

2

5

2222

In ConclusionHow To Craft A Winning Strategy

2323 Successful Strategies for Today’s Energy Market

1. Capital stewardship focused on returns 2. Demonstrate competitiveness relative to other sectors3. Direct engagement with investors - rely less on intermediaries4. Run data-dependent IR programs to evaluate successful

marketing5. Be transparent about managing future risk6. Stress test around carbon tax and reserves write downs7. Lower carbon intensity & link this to the value proposition 8. ESG disclosure should be included in all investor decks9. Link compensation to value creation and environmental measures10. Increase female representation at board and management level

2424

Thank You!

Tamar EssnerDirector, Nasdaq Energy Capital Marketstamar.essner@nasdaq.com+1 212 312 1344

81% Nasdaq IPO Win Rate 201987% Nasdaq VC Backed IPO Win Rate 201980% Nasdaq PE Backed IPO Win Rate 2019