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).
Picture of 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

risk-manager-sector
Trading and Risk
ByChris Griggs

In the fast-paced world of energy commodity trading, staying ahead demands more than just raw data. Insightful, actionable intelligence allows you to forecast, plan and respond to global market shifts confidently.

nuclear-worker
Energy Transition
ByAshmal Dawoodani

This ETT covers EIRs recent report reviewing advanced nuclear technologies.

trading-and-risk
Trading and Risk
ByAl Salazar

Al Salazar of Enverus Intelligence® Research predicts rising crude oil and natural gas prices, driven by market dynamics, OPEC discipline, and seasonal demand. Learn more about the bullish outlook for Brent crude and Henry Hub natural gas prices.

operators
Oilfield Services Operators
ByJose Neto

In the pursuit of capital efficiency, operators strive to continually improve drilling and completion performance, especially in the challenging landscapes of Canada's unconventional plays.

energy-transition
Energy Transition
BySmayan Sharma

The Inflation Reduction Act spurred a surge of project announcements and developments on the molecules side of the energy transition, creating numerous opportunities for capital deployment.

Enverus Blog - 6 reasons to attend Enverus’ 2023 EVOLVE Conference
Analyst Takes
ByAndrew Dittmar

In a significant move reshaping the U.S. shale landscape, ConocoPhillips has agreed to purchase Marathon Oil for $22.5 billion, marking a shift towards multi-basin operations and promising a robust future for shareholders with enhanced capital returns and increased operational scale.

persona---Operators-with-non-operating-assets-
Operators
ByMac Graham

The oil and gas industry is no stranger to uncertainty. Producers contend with a myriad of challenges – everything from supply chain uncertainty, geopolitical shocks, ROI demands from investors and an unpredictable policy environment – so it’s no wonder a...

energy-transition
Energy Transition
ByKevin Kang

The anticipated end of a two-year reprieve on solar panel tariffs from China coincided with unexpected tariffs on other energy transition-related sectors.

brno-enverus
Operators
ByBryn Davies

Our twelve-member team embarked on the memorable Vltava Relay challenge, covering 360km in 35 hours, with 300 other competing teams.

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

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert