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

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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).

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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.

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