ENERCOM ANALYSIS Long Money Is Looking For More Than Free Cash Flow

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ur goal at EnerCom is to facilitate access to capital markets for oil and gas companies, and as such we spend a great deal of time looking at investor trends.

Clients are increasingly asking us for help in attracting new investors. And every public company wants to secure larger commitments from the investors they already have, whether that is through inclusion in a passive index or through improving their messaging and stepping up marketing efforts to active investors. To help our clients better navigate capital markets, EnerCom Analytics examined investor trends in energy going back to late 2013 to see where

Among active investors, certain styles dominate in the oil and gas space. Historically, most active investors in oil and gas have been: 1. Growth, 2. Growth At A Reasonable Price (Garp), 3. Value, Or 4. Long/Short Hedge Funds. These four fund types are the largest holders of large, mid and small cap E&P stocks. While some other types may be in the space, like arbitrage, income and momentum, these hold only small slivers of the

money is flowing and what attracts the attention of capital markets.

average E&P, and many fund types show wild changes in holdings from

BEFORE THE PRICE CRASH, GROWTH WAS THE NAME OF THE GAME

One significant overall trend in holdings has been the decline in GARP

Prior to the oil price crash in late 2014, growth was the name of the game.

Before the oil price drop, these funds held some of the largest stakes in

Investors put their money in the hands of companies with plans to increase

E&P firms. In September 2013, GARP funds held 19% of the average

output. They were content to watch production – and their returns – grow.

large cap company, 14% of the average mid cap, and 13% of the

quarter to quarter.

funds since the beginning of the downturn.

average small cap E&P. The upheaval experienced over the last three and a half years quickly changed the priorities of capital providers, however. The crash in oil prices exposed the dangers of over-exposure to commodities and the weakness of balance sheets built on growth at any cost.

This decline has not reversed with the recovery of oil prices. While average WTI prices have nearly doubled since March 2016, GARP funds have not meaningfully returned to the space. Small cap firms have

Institutional investors pulled out of oil and gas during the downturn as

seen GARP interest decline still further, and GARP holdings of the average

companies looked for ways to adjust to lower prices. Some investors

small cap firm have decreased steadily since.

have returned as efficiencies gained by the industry and steadily improving prices led to improving financial performance. But not everyone is ready to jump back into the industry, EnerCom found, during in its analysis of these trends.

GARP Fund Holdings Source: Company filings, EnerCom Inc.

16 ENERCOM360 M A G A Z I N E

GARP funds have a more neutral view of large and mid cap companies, and have kept their holdings in such firms essentially flat over the past year.