Energy Analytics

Attractive E&P Yields Are Becoming Difficult for Investors To Ignore

byAndrew McConn

Finding high-yield investments has become more difficult in recent years. One reason why E&P stocks have outperformed all sectors year-to-date (XOP up 88% versus S&P up 23%) is because of attractive free cash flow (FCF) yields, even after the sector has rallied. Nearly all E&P stocks continue to offer double-digit FCF yields — based on our estimates in 2022 — and screen attractive versus stocks in other sectors.

2022E FCF Yields (Assuming Strip Commodity Prices)

Chart displaying 2022E FCF Yields (Assuming Strip Commodity Prices)
Source: Enverus Valuation Analytics. “FCF Yield” is calculated as 2022E Free Cash Flow/Market Cap. Commodity-price assumptions and market caps are based on market values as of Oct. 28, 2021.

Even in lower price scenarios that are more representative of the market’s long-term expectations, E&Ps’ FCF yields still screen attractive.

2022E FCF Yields at Lower Price Scenarios

Chart displaying 2022E FCF Yields at Lower Price Scenarios
Source: Enverus Valuation Analytics. Each data point represents a company’s annualized FCF yield in each quarter during 2022. WTI/HH price scenarios include $50/$2.50, $60/$3, $70/$3.50 and Base Case (Strip).

But short-term FCF yields can only reveal so much about a sector’s overall value. The market is ascribing value to potential growth — or long-term yield sustainability — as indicated by a positive correlation between higher valuation multiples and our estimates for high-quality well inventory lives.

However, accurately estimating inventory remains difficult for investors. We see significant dislocations between market value and intrinsic value at the individual stock level. Attractive relative-valuation opportunities exist for investors willing to invest the time and effort.

Valuation Multiples Versus High-Quality Inventory Life by Basin Peer Group

Chart displaying Valuation Multiples Versus High-Quality Inventory Life by Basin Peer Group
Source: Enverus Valuation Analytics. Basin peer groups represent groups of E&Ps tagged to a primary basin. “Inventory Life” is calculated as inventory of un-completed wells with a sub-$45 WTI (or sub-$2.25 Henry Hub) half-cycle breakeven/wells completed in next 12 months. “EV / CPV” is calculated as (market enterprise value/current production valuation).
Andrew McConn

Andrew McConn

Andrew McConn is director and co-head of Commercial Intelligence at Enverus, where he covers large-cap E&P companies and leads product development for the Commercial Intelligence offering. He joined Enverus in 2019 to develop Operator Intelligence — a predecessor to Commercial Intelligence that features valuation, trend and benchmarking analysis for more than 200 U.S. E&Ps. Prior to joining Enverus, Andrew worked as an analyst for energy-analytics and E&P businesses for a decade. He holds a B.A. in corporate communication with a minor in economics from the University of Houston and is based in Houston.

Subscribe to the Enverus Blog

A weekly update on the latest “no-fluff” insight and analysis of the energy industry.

Related Content

Enverus Press Release - Blue hydrogen: Greening the bottom line
Energy Transition
ByCarson Kearl

In a world where energy value can make up a small portion of the revenue stream from emerging business models, what else is at play? Enverus Intelligence Research® views effective energy transition business as taking advantage of two key additive...

Intelligence Oilfield Services
ByErin Faulkner

Permitting information for oil and gas wells is one of the most readily available and least lagged pieces of data on industry activity, but it is often seen as a poor indicator of future drilling activity.

Enverus Press Release - Exploring falling rigs and rising production
Energy Analytics Minerals

While horizontal drilling and hydraulic fracturing significantly enhance well productivity, they have had the opposite effect on the land department.

ByJoseph Gyure, Editor, Enverus Intelligence

All seven regions covered by the Enverus Day Rate Survey saw rates rise sequentially for the second time in three months in January as confidence started to strengthen among U.S. land drilling contractors.

Energy Transition Intelligence
ByJoseph Gyure, Editor, Enverus Intelligence

Ørsted took a blade to its project pipeline, reducing its ambition to 35-38 GW of installed capacity by 2030 from the previous 50 GW.

ByJoseph Gyure, Editor, Enverus Intelligence

SLB has reaffirmed its 2024 financial guidance, part of an effort by international oilfield services companies to reassure investors after the Saudi Ministry of Energy called off plans to increase its maximum sustainable capacity by 1 MMbo/d to 13 MMbo/d...

Analyst Takes Energy Transition

Despite the relatively scant incentives for buying an EV in the U.S. compared to other countries, the U.S. Environmental Protection Agency (EPA) presented its plan in 2023 to tighten tailpipe emissions regulations.

Enverus Blog - Increase visibility and efficiency with OpenTicket Mobile digital field ticketing software
Trading and Risk

Amid significant volatility in global energy markets, U.S. President Joe Biden’s decision to temporarily halt approvals for pending liquefied natural gas (LNG) projects seems to defy conventional trading wisdom. This audacious move has given rise to a variety of viewpoints...

Enverus Blog
Intelligence Trading and Risk

In the ever-changing energy landscape, understanding market fluctuations, weather conditions and system resilience is paramount when factoring ideas for trading opportunities.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Sign up for our Blog

Register Today

Get Energy Transition Research updates straight to your inbox by filling out the form below.

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert