Publicly traded oil and gas E&P companies (NYSEARCA:XOP) are known for a number of things. Historically, they have been excellent performing stocks, having way outperformed the indices in the past 10 years, albeit with higher volatility. The below chart shows this outperformance, and the performance is even more pronounced in the prior 5-year period, during which oil prices more than doubled.
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However, E&P businesses are very capital intensive. On the exploration front, capital is deployed acquiring leases, shooting 3D seismic, and then finally drilling exploration wells. And on the development side, drilling development wells requires significant development capital. Often these projects are equity and debt financed, rather than supported by internal cash flows.
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