Oil’s Minnows Need to Start Earning Their Keep
Capital is getting costlier, forcing change on smaller E&P firms.
Struggling for space.
Photographer: Martin Schutt/dpa-Zentralbild/dpa/Getty Images
This is a big year for the U.S. oil and gas industry. If the past five have constituted a reckoning with the old frack-it-till-you-make-it model, then this one is where we find out if the reckoning stuck.
The new mantra espoused by many energy companies is that returns are king. They are. The chart below, which I have adapted from one used by Kimmeridge Energy Management Co., shows the close relationship between return on capital and stock performance. It compares how share prices moved in the five years through the end of 2018 with an implied change in the market cap based on that period’s cumulative economic value added, a measure of value creation or destruction.1The sample consists of 55 U.S. oil and gas companies with a market cap of at least $250 million (as it runs through the end of 2018, it includes a couple of companies acquired since then, Anadarko Petroleum Corp. and Carrizo Oil & Gas Inc.).