Nasdaq Energy Capital Markets Update

The energy sector has been the best performing group in the equity markets in 2022, with the benchmark S&P 500 Energy Index gaining 44% through the end of August, while the broader S&P 500 Index has declined 17%. Support for equities in the energy sector has stemmed from sizeable gains in crude oil prices (WTI crude oil +19% and Brent crude oil +24% through the end of August), while natural gas prices have risen by more than 140% through the end of August. This has driven significant free cash flow generation across the sector, which has largely been returned to shareholders in the forms of dividends (fixed and variable) and share repurchase programs.

Tight global supplies, the Russian invasion of Ukraine early in 2022, which increased geopolitical risks and premiums, long-term underinvestment in new oil and natural gas producing projects across the globe (see graphic below), rebounding demand for oil, gasoline and distillate products from early pandemic lows, and a lack of production responses from OPEC+ and U.S. producers have all contributed to the rise in oil prices throughout 2022.  

Figure 1. Oil and gas field development CAPEX has fallen with no rebound in sight

 Oil and gas field development CAPEX, global, $ billions

Additionally, boycotts of Russian-produced oil and other business ties with Russia also impacted the global supply chain of crude oil flows. Meanwhile, natural gas prices have surged due primarily to crimped LNG flows from Russia to Europe and associated shortages for power and manufacturing use of the commodity.

These dynamics have led to unexpected and unprecedented upward pressure on global energy prices, which has boosted revenue and cash flow generation for energy producers. 

According to a consultant study by Deloitte published in August, “High energy prices could almost double oil producers’ free cash from operations this year to $1.4 trillion, money that can be used to finance a shift to renewable fuels, pay down debt or reward investors.” 

The resulting rise in profitability has driven a surge of fresh capital allocation to energy companies in 2022. According to Lipper fund flow data reporting, energy sector ETFs have risen by more than 60% YTD through the end of August due to a combination of fund inflows and gains in the underlying market securities.

Investor style shifts have also been very pronounced across the energy, with a seismic shift of capital moving from value-oriented investors to growth-oriented investors. According to public holdings data disclosures and Nasdaq IR Intelligence analysis, GARP and growth investors have combined to add ~$65 billion YTD to their energy portfolio allocations through the end of August, while value investors have reduced their energy portfolio exposure by ~$41 billion in the same time period. This has occurred during a period where the S&P 500 Energy Index’s sector weighting in the S&P 500 Index has risen from ~2.5% as of YE’21 to ~4.3% through early September 2022.

This shifting investor landscape across energy has created new opportunities for investor relations teams to engage with the buy-side. When asked to talk about investor interactions over the last five to seven years and how he’s seen the change in the relationship using the sell-side and the impacts of MiFID, Mark Keener, former IRO at ConocoPhilips, expressed the following:  

“MiFID, MiFID 2, the confluence of the berth of returns in energy for a decade with ESG and related quick transition concerns, all of that I think took a collective toll on those relationships, and of course, we have seen a lot of turnover in sell-side shops. Some of it is shuffling the seats, some of it is the reduction of teams or asking the same people to cover more, and I think that that has been a challenge for them… I think it comes down to the quality of the relationships that you build over time.”

Following the response, Keener added, “If you do your job well in IR, your executive team members can see consistently over time that you’re only putting them in high-quality meetings or meetings where they can have an impact and that it’s a good use of their very busy schedule then that’s another key element of trust.”

When asked what advice he would give to an IRO, Keener gave the following response, “Take the time to build out your relationships, don’t expect these things to happen overnight. Build those relationships with the sell-side, with the buy-side and push hard, bust your tail. I always tell my kids always assume that you won’t be the smartest person in the room but that you can outwork anybody.”

Nasdaq IR Intelligence found that companies are being more selective in terms of the prioritization of their investor engagement activities. While the pandemic made virtual meetings and conferences a standard feature of IR programs—and brought time efficiencies and cost savings—IROs are increasingly focused on investor meeting quality.

This has been a critical development for IR teams across the energy sector, requiring them to have a defined strategy on which meetings should be in-person versus virtual. For their part, investors are also being choosy as to which meetings should be virtual or in-person; it is important that corporates understand and align with these preferences to avoid turning up to empty meeting rooms.

To hear more from Keener and the experts at Nasdaq, watch the complete Energy Webinar.