Attracting More Generalist Investors in North America to the Oil and Gas Industry

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Jeremy McCrea April 19, 2024 Energy Research & Strategy

Oil and gas companies have recently managed to court some interest from generalist investors, such as pension funds and broad-based mutual funds, and now face the challenge of increasing investment from this important source of capital.

Over the past year, generalist investors have taken an interest in the sector partly because crude oil has climbed more than 25% so far this year¹, while many energy companies have cleaned up their balance sheets and are investing in growth. Also, many continue to increase shareholder value by buying back shares. Since January, the S&P/TSX Capped Energy Index is up about 24%.²

How can producers continue increasing interest among generalist investors? That’s what was discussed in the “Access to Capital” panel I moderated at the recent BMO Capital Markets CAPP Energy Symposium in Toronto. The panel featured:

Rob Broen, President and CEO Athabasca Oil
Jason Jaskela, President, CEO and Director, Headwater Exploration
Steve Loukas, President and CEO, Obsidian Energy
Brian Schmidt, President and CEO, Tamarack Valley Energy

It’s still the early days when it comes to generalists moving into the energy space, said Athabasca’s Rob Broen, but investors are looking for companies that provide competitive returns, durability through commodity cycles, and can scale. With a clean balance sheet, plenty of cash, a large reserve base and good trading liquidity, Broen said Athabasca is in a good position to give investors what they’re looking for.

Headwater’s Jason Jaskela said generalists are starting to move down cap and invest in companies with long-duration assets. Strong balance sheets are critical, too. “People want to see sustainable resources for a long period of time,” he said. “Those organizations are starting to see multiple expansions, and hopefully that continues.”

It also helps to be in the S&P/TSX Energy Index, added Obsidian’s Steve Loukas, whose company, among many other smaller producers, is not yet included. He’s seeing interest from high-net-worth family offices, but “there’s a line in the sand that’s been drawn, and you need to be indexed.”

A multi-strategy approach

For companies to continue attracting capital, they’ll need to take a multi-prong approach to increase value, noted the panelists. One common strategy to boost value is through share buybacks. Athabasca, for instance, is allocating 100% of its free cash flow to share repurchases. In 2023 alone, it bought back 58 million shares. “Based on today’s price, that was a good investment,” said Broen. “We’re in the market every day through an automatic repurchase plan, and through those buybacks, you get compounded cash flow per share growth. That’s a formula that’s been working.”

While Loukas’ company has also bought back shares, he’s wary of only relying on repurchases. “If you’re operating at a high level and you buy back new shares, are you raising the point that it’s not as attractive on a relative basis relative to some of your other opportunities?” Growing production, improving cash flows, and repurchasing shares at accretive prices “is a powerful combination when things go your way, and they certainly are right now,” he said.

Growing interest from U.S. investors

Some panelists noted that they’re seeing more interest from U.S. investors, with Tamarack’s Brian Schmidt pointing out that some of the biggest generalist investors in Canada – Canadian pension plans – continue to move away from the sector. “We used to be about 45% owned by Canadian pensions, and that’s gone down to about 7%,” he said.

For him, the big question is how to replace that capital, and so far, it’s by attracting U.S. investors. They’re interested in buying assets that have tier-one inventory and low decline rates, he explained. “That’s resonating with U.S. investors, and it’s where we’ve had the biggest impact over the last, say, six months,” he said.

Although, the pendulum may be swinging back when it comes to Canadian investors, as many have a solid understanding of the oil and gas sector.

The energy sector’s significant progress around emission reduction is something investors may also want to pay closer attention to. As Lisa Baiton, CAPP’s President & CEO said in her opening remarks to the symposium, the conventional oil and gas sector has grown production while reducing emssions over the past decade.

Many operations, however, don’t bring up their progress enough. “When the industry speaks about their investments and progress on emissions, they don’t call it out because it’s just part of their day-to-day business,” she said.

More focus on performance

Going forward, companies should expect more scrutiny from investors, especially around performance. Broen said he’s noticed people asking more questions about asset performance and operational results, where they used to focus almost solely on the balance sheet. “The meetings are much, much deeper on the quality and predictability of the asset base in terms of performance, and investors are more knowledgeable about what we have,” he said.

Investors now want to know how companies can “turn one dollar into three,” noted Jaskela. A couple of years ago, people wanted companies to give as much money as they could back to shareholders. Now they want to know how much more can the business grow and what the opportunity set looks like.

It's a process

While attention from generalists is increasing, it will still take some time before more oil companies and investors start thinking beyond dividend yields and buybacks, added Loukas. For too long, people thought you could engineer a big multiple with a large dividend, and then many clamored for buybacks. But Loukas pointed out that conversations have changed since Obsidian announced a three-year growth plan last September.

“Some investors embraced those plans because they recognize that the returns are more attractive than dividends, while there’s an upper bound on how many shares you can buy. It’s taken time, though,” he said. “The return of some of our development programs has validated the decisions we’ve made, but it’s a process.”

1 https://www.cnbc.com/quotes/@CL.1

2 https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-capped-energy/#overview

Energy Research & Strategy April 19, 2024

Jeremy McCrea Oil & Gas Analyst

Jeremy joined BMO Capital Markets in 2024, bringing over twenty years of energy research experience, with recognition including Top Gun rank by Brendan Woods Intern…

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