Entering text into the input field will update the search result below

In The E&P Space, 'Grow' Is A Four-Letter Word

May 03, 2018 9:57 AM ETCVX, RRC10 Comments
James Constas profile picture
James Constas


  • Growth investors have rotated out of oil and gas equities and have been replaced by value-oriented styles, as exhibited by Range Resources Corporation.
  • Valuation disconnects have attracted activist investors.
  • There are some signs the oil markets have returned to fundamentals, and investors are looking for signs of an upturn.

People often talk about a “sea change” when describing a major change in perception, whether that change is in geopolitics, culture or financial markets. There is no doubt that the oil and gas markets entered new waters on November 26, 2014 when OPEC announced it would not make production cuts to offset growing oil production from other parts of the world, namely from the unconventional resource plays in North America. At that time, market sentiment quickly flipped from oil markets being demand-driven to supply-driven. Ever since, oil prices have fluctuated at levels far below their pre-2014 levels.

The tug-of-war between bulls and bears continues, as increases in the rig count drive supply concerns while drops in crude oil inventories give the bears something to cheer about. Neither side, however, has enough critical mass to drive oil prices convincingly. As investors navigate these turbulent waters, we believe they should be mindful of current investor sentiment and how it impacts E&P and energy-related equities.

One touchstone of how oil executives feel about the market is their Letter to Shareholders found in their annual reports. This year, we have detected a subtle, but significant change in tone and word choice from the C-suite. Companies that would have been otherwise bragging about their production growth rates have toned down use of the “G” word, especially when it is in the context of growing capital budgets, proved reserves and other key measures.

Since when did "grow" become a four-letter word?

Value investors own the conversation

The language has changed because there has been change in who owns E&P companies. Let’s take Range Resources Corporation (NYSE: RRC) as an example. The chart below illustrates the change in RRC’s shareholders with active investment styles from the end of 2014, just after OPEC’s Thanksgiving Surprise, and the most recent reported positions.

This article was written by

James Constas profile picture
James is co-founder of Prism Group, a management consulting firm focused on the oil and gas industry, and Prism Investor, an online news site offering subscriptions to a proprietary newsletter. James started his professional career in 1989 with the international oil giant Amoco Production Company and has 28 years of experience in corporate finance, investments, management consulting and marketing. In the 11 years prior to co-founding Prism Investor, James’s contributions helped a former employer gain recognition by Forbes as one of America’s best management consulting firms to the oil and gas industry. His experience includes being the CFO of a venture-backed startup, and has expertise in financial analysis and planning, valuation, investor relations, marketing, brand development and business development. James is a member of the National Association of Petroleum Investment Analysts. He holds a B.S. International Management from Arizona State University and an M.B.A. – Finance from the University of Denver.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Our firm has done business with PDC Energy, Inc.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (10)

VNOM is a good buy: they get 20% out of every oil well under their land without spending a single dime. They return 90% of their revenue to investors! Production is growing fast because others are drilling a lot of wells for them.
In 2014 Energy is 13% of SP 500 index. Now Energy is about 6%. What a disaster! Forget about growth, this is a cyclical industry. Return is what matters to investors. Do not believe any hype in energy space. No one has competitive advantage to others. Only buy companies that have a good record of earnings.
@$18.17, only takes about $300 million for a 5% stake, enough for hedge fund to redirect AR towards building shareholder value through proper capital return.
Time to consolidate Antero Resources (AR) to prevent pissing away valuable shareholder capital.
I see myself a growth investor in tech, where the asset "cost" (tech solution development $) is leveraged repeatedly over time to a presumably growing user base. There is a virtuous cycle here.

The oil (and other natural resource) industries are not like tech companies: They deplete their assets with each and every barrel (or boe) sold. They must then spend $ to replace that asset. As such, I have a hard time investing in an E&P that does not provide an IMMEDIATE ROI (in the form of a dividend). While I am GARP for tech, I am a value / dividend investor in oil.

Not judging (just asking) but can someone kindly provide an explanation (in common sense terms) as to why they buy an E&P that is showing growth in production but no (or minimal) profit being returned to shareholders? EOG is a good example.

Because a mining stock can still be a growth proposition. If the company has ZERO cash returns and even ZERO revenue, but has technical results showing they hold assets that are developable in a positive NPV manner, than the market will reward them. Even if it is years to getting returns. Same thing with a biotech. Now EVERY mining stock may not be like that. But it is still possible that some are. Or that some component of many shale companies is like that.
Take a look at CNX for the right way, take a look at AR for the wrong way. Not saying either is a good or a bad investment, but the capital allocation approaches make a difference.
Oil earnings are under scrutiny this week but I have profits of over 30% in CLR , WRD. and VNOM in less than a month. Not sure what these have in common with RRC.
James Constas profile picture
Thank you for commenting.

With respect to the RRC shareholder rotation, our analyses shows similar trends at other E&Ps and oilfield services companies. Not all, but enough to show that growth investors have yet to come back into the market. When they do, however, things can move quickly!
Agreed on the downplaying of growth. That said, I would not take RRC as an indicator for the overall US shale industry. They are gas focused and mostly in a basin that is still somewhat isolated.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.