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 [email protected]+1 212 312 1344
81% Nasdaq IPO Win Rate 201987% Nasdaq VC Backed IPO Win Rate 201980% Nasdaq PE Backed IPO Win Rate 2019