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

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

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