Podcast
Upstream, Exploration & Production
North American Energy Part 4: Investing Upstream
The evolution of the upstream bubbles up new investment opportunities.
About the Podcast
The evolution of the upstream bubbles up new investment opportunities.
North American Energy Part 4: Investing Upstream

We’re starting to witness an evolution in the upstream space. After years of habitually outspending cash flow and relying on capital market access to fund development programs, the industry appears to be focusing on cash flow neutrality—or said another way, simply matching capex to internally generated cash flow.

Anadarko Petroleum, a large-cap producer, has been at the forefront of this movement with its CEO, Al Walker, making waves when he called out Wall Street for its unhealthy focus on growth. Since that time, the movement has gained traction and it’s even included an emphasis on returning capital to shareholders. In conjunction with Q4 earnings, Anadarko, Pioneer, and Diamondback increased dividend payments. In addition, Anadarko, Pioneer, and Encana increased stock buybacks. Overall, we view this movement as very positive for the industry as it will lead to a more stable and sustainable business model. After being inflated for parts of 2016 and 2017, forward EV/EBITDA multiples are now 5–10% below the five-year average.

While trading at a discount, E&P companies seem stronger, more efficient, and appear to be becoming better stewards of capital than they have in the past. The industry is also somewhat unique in that some studies have shown that higher multiple names often outperform. In our opinion, the reason for this is that the multiple is often reflective of the quality of a company’s acreage. Top-tier acreage is a win-win for companies and investors, as it is more economic in low commodity price environments and enables an accelerated development profile in high commodity price environments. In keeping with this idea, Miller/Howard Investments looks to invest in companies viewed by us as having the best rock, lowest break-even costs, extensive drilling inventories, experienced management teams, solid balance sheets, and attractive valuations.

Note: As of March 21, 2018, Miller/Howard Investments held Anadarko Petroleum, Encana, Pioneer and Diamondback in its portfolios.

© 2018 Miller/Howard Investments.

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.

DISCLOSURE

Investment products: are not FDIC insured - May lose value - Are not bank guaranteed

Opinions and estimates offered constitute Miller/Howard Investments' judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. All investments carry a certain degree of risk, including possible loss of principal. It is important to note that there are risks inherent in any investment and there can be no assurance that any asset class will provide positive performance over any period of time. The material may also contain forward-looking statements that involve risk and uncertainty, and there is no guarantee they will come to pass.

The information above is from sources deemed to be reliable and is provided strictly for the convenience of our investors and their advisors. These materials are solely informational. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative of future performance. Investment Decisions: Do not use this report as the sole basis for investment decisions. Do not select an allocation, investment discipline or investment manager based on performance alone. Consider, in addition to performance results, other relevant information about each investment manager, as well as matters such as your investment objectives, risk tolerance and investment time horizon.

Past performance does not guarantee future results.