What Does a Growth Company Look Like Following the Downcycle?
Investors valued debt-adjusted growth even more in 2016
The crash in oil prices which started at the end of 2014 exposed a number of oil and gas companies that had sacrificed their balance sheet in the name of growth. Many were left over-levered and forced to sell assets or file for bankruptcy in order to make it through the ensuing downcycle.
An analysis done by EnerCom Analytics found that investors in 2016 were willing to pay an even higher premium for strong debt-adjusted growth than they were in 2014, when oil prices were above $100 per barrel.
Of the 56 companies examined by EnerCom, those that demonstrated greater than 20% debt-adjusted growth in 2016 saw their share prices increase 40%-140%.
Companies that reported debt-adjusted production growth of 20% or more in a similar analysis conducted by EnerCom in 2014 found the share prices of those companies appreciated just 20%-60% over the course of the year, suggesting that, now more than ever, investors value strong growth supported by a healthy balance sheet.
Three types of companies emerged in 2016
Looking at debt-adjusted growth to share price appreciation, EnerCom Analytics was able to identify three groups of companies:
- Growth Companies. Those companies that were able to grow debt-adjusted production by 20% or more over the course of the year, marked as gold in the graph above. Looking at just the companies that qualify as “growth” there is an r-squared of approximately 53%, suggesting that production plays a serious role in determining the companies’ share price.
- Constrained. Companies that were able to increase debt-adjusted production by 20% or more, but which did not see the corresponding uplift in share price over the course of 2016, marked in red above. Of these companies, many were E&Ps in the Marcellus. Pipeline constraints in the play could have kept the companies from realizing more attractive share price growth because investors didn’t feel the production warranted a premium if it was not able to reach markets. Other constraints to share price growth included weak balance sheets and the threat of bankruptcy.
- Catalyst-Driven. A number of companies saw their share prices change in 2016 without the corresponding increase in debt-adjusted production as the rest of the group, these were marked in blue. In fact, the company with the largest share price appreciation in the graph above had negative debt-adjusted production growth, suggesting that other factors were more important in determining the stock price of some companies.
Growth is just one piece of the puzzle
The company with the largest share price appreciation, WPX Energy (ticker: WPX), underwent a major transformation, completing more than $6 billion in M&A deals since 2014 to become a more oily company. Despite debt-adjusted production declining 63%, the company’s share price increased 154%, underlining the confidence investors have in the potential of the company’s acquired core assets in the Delaware Basin.
Another major catalyst for companies in the Catalyst-Driven group was paying down debt. Whiting Petroleum (ticker: WLL), for example, reduced its debt by $2.3 billion (41%) from March to December 2016, prompting a 27% increase in share price over the course of the year despite a small decrease in debt-adjusted production.
“Upon the completion of this conversion, we will reduce our debt by $721 million. After the conversion and the sale of our North Dakota midstream assets for $375 million that we anticipate to close in early 2017, we will have reduced our debt by $2.3 billion or 41% since March 31, 2016, approximately equal to all the debt assumed in the Kodiak acquisition,” Whiting Chairman, President and CEO James Volker said following the conversion of company notes in December.
What investors want in 2017
Running a similar analysis for companies using estimated 2017 production, EnerCom found that markets were much more focused on catalysts than production growth. Companies in the Catalyst-Driven group from the first analysis that had strong share price appreciation despite low production growth continue to show similarly strong share price appreciation compared to their 2017 estimated production, indicating that the catalyst is more interesting to investors than the production.
The specific catalysts that attracted premium multiples was discussed more in-depth in EnerCom’s Energy Industry Data and Trends for January 2017, where this data appeared originally. If you would like a copy of the January report, or would like to subscribe to EnerCom’s Energy Industry Data and Trends and see more in-depth reports on the oil and gas industry ahead of their publication on Oil & Gas 360®, click here.