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November 15, 2022 | U.S. Equity
The Current State of Energy

Portfolio Manager

Matthew Fleming, CFA, is a co-portfolio manager for our Small Cap Value, Mid Cap Value and SMID Value strategies and research analyst focusing on the energy, utilities, and industrials sectors. Before joining William Blair in 2021, he was a member of the small- to mid-cap value equity teams at ICM. Before joining ICM in 2008, Matt was a senior research analyst at PNC Capital Advisors/Mercantile Capital Advisors from 2004 to 2008. Before becoming a research analyst, he held various roles at GB Asset Advisors, Triumph Group, and BT Alex. Brown/Deutsche Bank AG. Matt holds the Chartered Financial Analyst designation. He received a B.A. in history from Princeton University.

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The energy sector has undergone immense change since 2020. In this video, Matt Fleming, CFA, a co-portfolio manager and research analyst on William Blair’s U.S. value equity team, discusses which areas of the energy sector stand out right now, in his opinion; our approach to identifying leading, high-quality energy companies; and why we believe there are still many compelling investment opportunities in energy despite the sector’s recent outperformance.

Watch the video or read the recap below.

Are energy valuations still attractive given the outperformance of the sector since 2020? Is the energy trade still active?

We find the energy space very attractive right now. We think valuations are compelling. I think it’s counterintuitive given what the run in stocks has been, which has been very impressive. But when you drill down and do the math, the stocks themselves, we believe, are discounting a commodity price that is significantly lower than the current price.

Historically, energy stocks trade somewhere between 4 and 6 times for exploration and production (E&P) companies, and right now there are many companies trading below 3 times, so we think there are a number of compelling opportunities.

Are there areas of the energy sector that are more attractive than others?

Right now, we’re focusing on exploration and production companies for two reasons.

The first is the dramatic structural change that you’ve seen in the industry, where there is real capital discipline that you’ve not seen in the past, where companies are spending less than they have and returning the excess cash to shareholders.

And the second thing that’s attractive to us is natural gas. We’ve seen a real resurgence in natural gas that we think is structurally sound. Historically, natural gas really moved around a lot with weather, but also with the excess gas that was associated with oil production.

Today, you’ve started to see real discipline in terms of production of natural gas as well as oil, so we think there’s a real structural change there, and we think we’re going to see higher commodity prices for longer.

How have mid-cap energy companies performed recently? Do they still have room to run?

Mid-cap exploration and production companies have benefited from rising commodity prices almost as much as large cap, and in many cases, they’ve exceeded the performance of large cap companies. I think there’s a lot of room to go because what you’ve seen is a disparity in valuation between larger companies and smaller companies.

I think there’s a lot of room to go because what you’ve seen is a disparity in valuation between larger companies and smaller companies.

I think many of those companies are trading at a discount to their larger peers, and so you’ve got room to continue to grow through earnings improvement, but also multiple expansion.

How do you analyze opportunities in the energy sector?

What we focus on in energy is the same as what we do throughout the portfolios.

We look for high-quality companies with market-leading franchises. In the energy space, that’s defined by strong positions and strong geographies, so we want to find companies that are in leading shale plays, have low-cost operations, and have strong shareholder returns.

We want to find companies that are in leading shale plays, have low-cost operations, and have strong shareholder returns.

It’s a lot harder than it used to be because with higher commodity prices, balance sheets have been cleaned up and a lot of plays are commoditized, meaning that you can make money pretty much everywhere in the energy sector.

So, we’re focusing on our leading companies that are doing more with less; we’re focusing on operational productivity, cash flow generation; and then in the mid-cap space, what we’re looking for are emerging leaders in return of shareholder capital.

Why is downside risk important when considering the starting place in the risk/reward assessment, and how does that make for a more efficient process?

We always try to focus on the downside. Our belief is that we want to protect the downside, preserve our clients’ capital, and the way we do that is we come up with very conservative forward estimates, in our view, and then we place a very low multiple that’s at the low end of the historical range. And once we come up with what we think is a conservative downside, we try to buy stocks within 10% of that range.

So, therefore, we believe that if our thesis is correct, the upside will take care of itself and potentially be quite attractive.

Matthew Fleming, CFA is a co-portfolio manager for William Blair’s U.S. value equity team.

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Portfolio Manager

Matthew Fleming, CFA, is a co-portfolio manager for our Small Cap Value, Mid Cap Value and SMID Value strategies and research analyst focusing on the energy, utilities, and industrials sectors. Before joining William Blair in 2021, he was a member of the small- to mid-cap value equity teams at ICM. Before joining ICM in 2008, Matt was a senior research analyst at PNC Capital Advisors/Mercantile Capital Advisors from 2004 to 2008. Before becoming a research analyst, he held various roles at GB Asset Advisors, Triumph Group, and BT Alex. Brown/Deutsche Bank AG. Matt holds the Chartered Financial Analyst designation. He received a B.A. in history from Princeton University.

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