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- 1. VALUE OVER VOLUME A Call to Action for the Energy Sector Dan Pickering March 8, 2020
- 2. 2 Punch Line US oil and gas companies must adopt a VALUE OVER VOLUME strategy: cutting capital spending / investment to maintenance levels (or lower) to reduce global oversupply, protect/increase free cash flow and begin to restore investor confidence The Oil Market Is Broken Slowing Worldwide Economies OPEC+ Discord/Surplus Capacity Ongoing US/Global Supply Growth Investor Apathy High Spending is One of the Few Variables an Energy Company Can Control WHY? 3.2% Energy Component Of S&P 500 Lowest Ever(1) Source: Bloomberg (1) 1989 is the first year the S&P started tracking the energy component
- 3. 3 0 2 4 6 8 10 12 14 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% USOilSupply,MMBbls/d S&P500EnergyWeighting% S&P 500 Energy Weight US Oil Production On The Path To Irrelevancy US Oil Production vs. Energy S&P 500 Weighting Painful Facts 4 of 5 years losing money(1) 4 of 5 years underperforming S&P 500(1) Energy worst performing subsector of past decade More of the same YTD in 2020 Source: Bloomberg (1) During 2015-2019 time frame, 2016 was the only year that energy outperformed the S&P 500
- 4. 4 Suggested Mantra: VALUE OVER VOLUME Target 1 – 2 - 3 1x Debt/EBITDA 2%+ Dividend Yield (competitive w/ S&P 500) 3%+ Additional Free Cash Return Easy As 1 – 2 - 3 WIN WAIT to ramp next time CONSIDER consolidation COMMIT cash back to shareholders INCREASE free cash flow STOP spending to grow REDEFINE the concept of value Value Over Volume Trademark Pending
- 5. 5 Today’s Environment – Every Man For Himself! “Global oil producers face brutal reckoning after epic OPEC+ fail” – Bloomberg “Fed slashes rates in emergency response to Coronavirus” – Politico Demand Growth Evaporating On Coronavirus Impact Supply Set To Explode On March 2020 OPEC+ Failed Meeting Global Oil Inventory Already Above Average Swift, Decisive Action Required
- 6. 6 Situation Overview Source: EIA, Macrotrends. This information is for illustrative purposes only. Relentless US shale growth has outstripped demand, depressed prices and crushed investors US growth has come at substandard returns (below cost of capital, below S&P 500 average) Investors are frustrated and have been abandoning energy for years ESG concerns exacerbate investor disinterest Coronavirus impacts weaken demand and push market further out-of-balance Fracturing of OPEC+ leaves market in freefall 5.0 mmbbls/d 2008 8.8 mmbbls/d 2016 12.9 mmbbls/d December 2019 11.0 mmbbls/d 2018 Current Reality
- 7. 7 -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 7 8 9 10 11 12 13 14 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 %Return USOilProduction(mmbbls/d) Since June 2014 US Oil Production +52% S&P 500 (Ex-Energy) +65% Majors -48% Oily E&P -69% US Oil Supply Growth vs. Energy Stock Performance Source: Bloomberg –June 30, 2014 thru March 6, 2020 (1) Oily E&P: Equally weighted returns of APA, APC, DVN, EOG, ECA, NBL, MRO, PXD, CXO, FANG, PE, WPX, CDEV (2) Majors: Equally weighted returns of XOM, CVX, COP, BP, RDS/A, OXY S&P 500 (Ex-Energy) US Oil Production US Volume Growth Is Not Creating Absolute Or Relative Value Majors(2) Oily E&P(1)
- 8. 8 -100% 0% 100% 200% 300% 400% 500% 0 20 40 60 80 100 120 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 %Return USGasProduction(Bcf/d)US Gas Market Analogy is Scary Massive Growth In Production | Dramatic Gas Price Erosion | Value Destruction For Gassy E&P Companies Source: Bloomberg – December 31, 2004 thru March 6, 2020 (1) Gassy E&P: Equally weighted returns of RRC, AR, COG, EQT US Gas ProductionGassy E&P(1) S&P 500 (Ex-Energy) Since December 2004 US Gas Production +94% S&P 500 (Ex-Energy) +155% Gassy E&P +50%
- 9. 9 Investors “Told You So” Further Selling Lower Values / Stock Prices Continued Underperformance vs. S&P 500 Cycle Both Supply and Demand Challenges Have Emerged Supply/Demand Imbalance Price Decline Cash Flow Decline Capex Decline Production Decline Two Big Challenges For Industry Supply / Demand Pothole Investor Distrust / Exodus Status Quo Approach Addresses Neither Issue Status Quo
- 10. 10 VALUE OVER VOLUME Addresses Both Key Industry Issues Gives Energy Sector a Chance to Eventually Compete for Investor Mindshare and Capital More Cash At Any Given Oil Price Support For Macro/Price via Less Supply Restore Investor Confidence Reduce US Production / Supply via Lower Capital Spending Investors “They Finally Get It.. I Will Take a Look at This Industry Again” Supply / Demand Pothole Investor Distrust / Exodus VALUE OVER VOLUME
- 11. 11 Capital Discipline Being (Relatively) Rewarded 2018 Performance 2019 Performance Capital Discipline PledgersNon-Capital Discipline Pledgers Capital Discipline PledgersNon-Capital Discipline Pledgers Pledgers Outperforming “Returns Focus” Now A Mantra Non-Pledgers Decimated 53 87 121 0 25 50 75 100 125 150 XEC CHK DVN RRC EQT APA NBL CXO PXD COG EOG APC VLO XOM MRO HES OXY PSX CVX RDS MPC BP TOT COP PerformancevsS&P 500 This Will Last For Years Source: Bloomberg as of 12/31/2019. Definition of pledgers vs non-pledgers courtesy of Evercore 30 81 128 - 25 50 75 100 125 150 CHK RRC EQT OXY COG CXO XEC MRO EOG APA BP MPC COP XOM RDS/ A TOT CVX PXD DVN VLO PSX NBL HES PerformancevsS&P500
- 12. 12 Implementing VALUE OVER VOLUME (Energy Industry) Oil price $65/bbl+ for 2-4 quarters before thinking about returning to growth Reduce debt to 1x debt/EBITDA Institute 2%+ dividend (in line or better than S&P 500) Share repo or other cash return 3%+ Lower capex offsets lost barrels for many companies Shift to maintenance capital or lower Stop growing supply Protect the balance sheet at all costs Stop focusing on “amazing” well returns Start generating financial/shareholder returns WIN WAIT to ramp next time CONSIDER consolidation COMMIT cash back to shareholders INCREASE free cash flow STOP spending to grow REDEFINE the concept of value No premium, industrial logic combinations (we recommend)
- 13. 13 Implementing VALUE OVER VOLUME (Wall Street) Encourage VALUE OVER VOLUME Principles – Redefine Stop Increase Commit Consider Wait Win Conversations with Industry Conversations with Counterparts Conversations with Peers Use the 1-2-3’s As A Measuring Stick 1x Debt/EBITDA 2%+ Dividend 3%+ Cash Return (Share repo / special dividend) Avoid Wanton Supply Growers Don’t Abandon The Industry…The World Needs A Healthy Energy Sector! (we recommend)
- 14. 14 About Pickering Energy Partners Energy – Focused Investment Strategies And Consulting Services Today’s Pickering Energy Partners takes an entrepreneurial approach to creating fundamentally-sound strategic advice and energy asset management and investment strategies. Headquartered in Houston, Texas, PEP combines the leadership of Dan Pickering with an experienced, opportunistic team that aims to provide guidance and long-term value for clients while having a positive impact on the companies and communities that PEP invests in. For more information, please visit www.PickeringEnergyPartners.com. The original Pickering Energy Partners was founded in early 2004 by Dan Pickering as an institutional energy research firm before subsequently partnering with Bobby Tudor and Maynard Holt in 2007 to become Tudor, Pickering, Holt & Company.
- 15. 15 Value Over Volume A Call To Action For the Energy Sector Published March 8, 2020 -------------------------------------------------------- WTI Front Month Oil ~$41 Brent Front Month Oil ~$45 Henry Hub Front Month Gas $1.70 Dow Jones 25,865 S&P500 2,972 S&P1500 Energy 312 XLE 42.50 XOP 12.91 OIH 7.35 AMZ 155.87 Appendix
- 16. 16 Pushback To VALUE OVER VOLUME (Part 1) The Issue Our Responses Debt Covenants Loss of Acreage Parent-Child Timing Requirement VALUE OVER VOLUME won’t work for every company depending on where they are with acreage capture, decline curves, leverage restrictions and pad drilling programs Most public E&P companies are past these issues Loss Of Rig/Operational Efficiencies VALUE OVER VOLUME is a 1-3 year commitment, not a few months It is worth dealing with operational challenges to achieve free cash and macro benefits Growth Investors Will Sell My Stock/Punish My Company The growth potential of a company is unchanged even if they choose not to grow at a particular point in the cycle Replacing production growth with free cash growth (good trade!) Value investors may replace growth investors Growth investors are rapidly fleeing from the energy sector. The OPEC pothole will accelerate this trend If The Returns Are There, Production Growth Is Good Great in theory, but not working in practice for public companies Not clear that companies can generate acceptable corporate-level returns at $50/bbl, much less below that
- 17. 17 Pushback To VALUE OVER VOLUME (Part 2) The Issue Our Responses Free Riding By Others/OPEC Time to focus on yourself, not others Market will take care of free riders (look at punishment of current “outspenders”) I Am Different/Better Some rock/balance sheet/drilling and completion skills are better than others Most companies have 3-5 years of high quality, low-cost inventory, so in the short run, everyone looks pretty similar Near-term differentiation is around capital deployment and strategies for use of cash
- 18. 18 Others Others Others Iraq Iraq Iraq UAE UAE UAE Kuwait Kuwait Kuwait Nigeria Nigeria Nigeria Angola Angola Angola Venezuela Venezuela Venezuela Iran Iran Iran Saudi Arabia Saudi Arabia Saudi Arabia 31.9 29.9 28.9 2018 2019 Jan-20 OPECSupply,mmbbls/d OPEC Was Supporting The Market Prior to March 2020 Source: OPEC Monthly Oil Market Report – February 2020 Change from 2018 -.05 mmbs/d +.05 mmbs/d -.08 mmbs/d +.06 mmbs/d -.08 mmbs/d -.62 mmbs/d -1.47 mmbs/d -.18 mmbs/d -.58 mmbs/d -3.0 mmbbs/d
- 19. 19 Disclosure Statement Contact Us Pickering Energy Partners 1111 Bagby, Ste 4920 Houston, TX 77002 THIS DOCUMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY AN INTEREST IN ANY FUND MANAGED BY PICKERING ENERGY PARTNERS LP (“PEP”). AN OFFERING OF SUCH INTERESTS WILL BE MADE ONLY BY MEANS OF A CONFIDENTIAL OFFERING MEMORANDUM (THE “MEMORANDUM”) AND ONLY TO QUALIFIED INVESTORS IN JURISDICTIONS WHERE PERMITTED BY LAW. Certain information contained herein has been supplied to PEP by third parties. While PEP believes such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete. The information contained herein is confidential (except for information relating to United States tax issues) and may not be reproduced in whole or in part. These materials were designed for use by specific persons familiar with the business and the affairs of your company and PEP materials. Any references to specific companies or securities herein are for illustrative purposes only . Such references are not intended to be, and may not be, representative of any portfolio or holdings of PEP. This document contains certain forward looking statements and projections. Such statements and projections are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements and projections. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. This document contains certain forward looking statements and projections. Such statements and projections are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements and projections. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. Any illustrative models presented in this document are based on a number of assumptions and are presented only for the limited purpose of providing a sample illustration. Any sample illustration is inherently subject to business, economic and competitive uncertainties and contingencies, many of which are beyond PEP’s control. Any sample illustration is not reflective of any actual investment purchased, sold, or recommended for made in the past or to be made in the future by any Fund managed or advised by PEP. Actual returns may have no correlation with the sample illustration presented herein, and the sample illustration is not necessarily indicative of an investment that PEP will make.
- 20. For More Information Walker Moody President, Pickering Energy Partners (O): 713.804.7576 (M): 713.213.6303 Email: wmoody@PickeringEnergyPartners.com 1111 Bagby St., STE 4920, Houston, TX 77002 Dan Pickering Chief Investment Officer, Pickering Energy Partners (O): 713.804.7573 (M): 713.398.3277 Email: dpickering@PickeringEnergyPartners.com Web: www.pickeringenergypartners.com