Nasdaq IPAA Presentation April, 2019

1 1

Energy Capital Markets:

A Sector in Transition

Nasdaq IPAA Presentation

April, 2019

2 2

Agenda

Capital Flows What’s driving recent energy market performance?

Valuation & Fundamentals Why is deep value money still on the sidelines?

Looking Ahead: 2020-2021 What macro & sector developments can we expect?

Conclusion How to craft a winning strategy

3 3

Capital Flows What’s Driving Performance &

What Does That Tell Us?

4 4

5%

0.46% 0.32%

(3%) (6%)

(11%)

(15%) (15%) (17%)

(21%)

Healthcare Utilities Cons. Disc. Technology Real Estate Cons. Staples Financials Industrial Materials Energy

2018 Equity Sector Performance

YTD Equity % Chg.

19%

17% 16% 15% 15%

13%

10% 10% 10% 8%

6%

Technology Real Estate Industrial Energy Cons. Disc. Comm.Svcs.

Cons.Staples

Utilities Materials Financials Healthcare

Q1'2019 Equity Sector Performance

YTD Equity % Chg.

After Being The Worst Performer In 2018, Energy Is

One Of The Better Performers In 2019

5 5

90

100

110

120

130

140

E&P Stocks vs. Oil Prices in Q1'19:

Despite the Strength, E&Ps Continue to Lag Oil Prices

XOP WTI Oil Price

WTI Oil Price +32%

XOP +16%

Even With Strong Gains, Energy Stocks

Continue to Disappoint

6 6

14%

7% 6% 2%

(10%) (12%)

(19%)

(26%) (27%)

(32%)

Utilities Healthcare Real Estate Cons. Staples Cons. Disc. Technology Industrial Energy Materials Financials

2018 Fund Flows by Sector: Energy's Equity Losses Corresponded with the Exodus

of Invested Capital

YTD Fund Flows % Chg.

91%

21% 13% 12% 12% 9%

9% 8%

3%

(0.45%) (3%)

Comm. Svcs. Real Estate Materials Technology Cons.Staples

Healthcare Utilities Cons. Disc. Energy Industrial Financials

2019 Fund Flows by Sector: Despite Energy's Solid Equity Gains, Fund Flows Trail Other Sectors

YTD Fund Flows % Chg.

Energy Continues to Lag Other Sectors in

Fund Flows

Source: Lipper

7 7

44%

21% 19%

18% 17% 16%

10% 10%

6%

18%

(10%)

(23%)

(11%)

(1%)

19%

(12%)

(7%)

30%

Land Drillers Mid E&Ps Large Services Large E&Ps Refiners MLPs Integrateds OffshoreDrillers

Small E&Ps

Short covering played a role in the Q1 gains of the Energy sector The 3 highlighted sub-sectors account for ~75% of the S&P Energy Index

Avg. QTD Equity % Chg. Avg. QTD SI Position % Chg.

Q1’19 Energy Performance vs. Short Interest

Positioning

8 8

Valuation & Fundamentals What Is Keeping The Long/Value Money

On The Sidelines?

9 9

0%

7%

14%

21%

28%

35%

Technology Financials Healthcare ConsumerDiscretionary

Industrials ConsumerStaples

Energy Utilities Materials Telco Services

Sector Breakdown of S&P 500 by Market Cap Over Past Decade:

While Energy's Absolute Market Cap Has Gone Up, the Sector's Relative Weighting Has Lost Share To Technology

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Energy dropped 62% in

Relative Market Cap Weight -

from 13% to 5%

Putting the Market into Perspective by Size

10 10

14%

3%

5%

10% 10%

7%

3% 3%

21%

13%

10%

18%

6%

7%

11% 11%

8%

4% 3%

19%

10%

2%

0%

5%

10%

15%

20%

25%

Health Care Materials Energy Industrials ConsumerDiscretionary

ConsumerStaples

Utilities Real Estate InformationTechnology

Financials CommunicationServices

Energy has 5% stock value relative to 7% earnings contribution, suggesting the sector is undervalued

Market Cap Weight EPS Next 12 Months Weight

S&P 500 Sector View: Market Cap

Weightings vs. Percentage of Earnings

Source: FactSet April 2019

11 11 Energy Returns Have Improved But

Still Lag Other Sectors

Source: FactSet April 2019. ROCE Estimates based upon data as of April 3, 2019

20%

15%

13% 13% 12%

6% 4%

19%

15% 14%

12% 11%

6% 5%

18%

16%

13% 15%

14%

6% 5%

0%

5%

10%

15%

20%

25%

ConsumerDiscretionary

Industrials Materials InformationTechnology

Health Care Utilities Energy

2017

2018

2019E

S&P Mid Cap ROCE by Sector

ROCE = EBIT / (Total Assets - Current Liabilities)

19% 19% 20%

16% 14%

11%

5% 6%

23%

19% 19% 17%

16%

12%

8%

5%

24%

21% 19% 18%

16%

13%

8% 6%

0%

5%

10%

15%

20%

25%

30%

InformationTechnology

ConsumerDiscretionary

ConsumerStaples

Industrials Health Care CommunicationServices

Energy Utilities

2017

2018

2019E

S&P 500 ROCE by Sector

ROCE = EBIT / (Total Assets - Current Liabilities)

12 12 Refiners Continue To Outpace All Other Energy

Sub-sectors In Returns

8.8%

8.1%

5.7%

2.4%

6.1%

4.0%

3.2%

1.8%

12.7%

10.1% 9.9%

9.3%

8.7%

7.8%

6.5%

0.1%

11.8%

9.9% 9.6%

7.5% 7.6%

6.9%

7.5%

6.1%

0%

2%

4%

6%

8%

10%

12%

14%

Refiner Midstream Integrateds E&P - Large E&P - Mid E&P - Small Services - Large Services -Mid/Small

Return on Capital Employed By Energy Sub-Sector

2017 2018 2019 Est. ROCE = EBIT / (Total Assets - Current Liabilities)

Source: FactSet April 2019. ROCE Estimates based upon data as of April 3, 2019

13 13

Looking Ahead What Developments Can We Expect

in 2020 – 2021?

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What Can We Expect in 2019-2020?

Challenges from the Macro Environment

Regulation on Corporate Access

Unbundling of Research & Trading

Increased Dominance of ETFs and

Index Funds

Contraction of sell-side

Small & Mid-caps will receive less research

coverage

Decrease in conference & meeting quality

International marketing particularly difficult

Issuers will need to set up their own

investor meetings

Passive assets are poised to surpass

actively managed assets in the U.S. in

2021 according to Moody’s Investor

Services

Passive assets already hold 35% of S&P

500

How to make the nuances of your

investment thesis matter in a market with

less discretionary capital?

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More Macro Headwinds Less Exclusive Focus On Energy

Increased Importance of Generalist

Investors

Analysts covering multiple unrelated sectors

Issuers need to simplify the investment

thesis

Think in investment themes vs. sectors

How do you compete outside of your sector?

16 16

Sector Trends & Developments in 2020-2021

• No Conviction On

Sustainability Of Oil Prices

+$60

• Perception That Energy Is

The New Tobacco

• Aramco IPO Planned For

2021

Tailwinds

• US Becomes Net Energy

Exporter On Consistent Basis

• IMO 2020

• Improved Financial Results

• Uptick in Reverse Mergers

• IPO Market & Pipeline

• Public M&A

Headwinds

• 2020 Election Year

17 17

(29%) (29%)

(21%)

(17%)

(6%)

CXO ECA XEC CHK FANG

E&P Equity Performance Post Acquisition Announcement Date Through Q1'19:

Markets Have Penalized Companies for Buying Other Public Companies

Equity % Chg.

M&A: A Necessary Catalyst to Excite Investors But Impediments to Deal Consummation Still Exist

18 18

Sector Trends & Developments in 2020-2021

• No Conviction On

Sustainability Of Oil Prices

+$60

• Perception That Energy Is

The New Tobacco

• Aramco IPO Planned For

2021

Tailwinds

• US Becomes Net Energy

Exporter On Consistent Basis

• International Maritime

Organization (IMO) 2020

• Improved Financial Results

• Uptick in Reverse Mergers

• IPO Market & Pipeline

• Public M&A

Headwinds

• 2020 Election Year

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Other trends for 2020-2021 Increased Focus on Environmental, Social & Governance (ESG):

A Challenge Opportunity

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Index Long-Only Activist

Investors Across All Strategies Are Focusing On ESG • No longer just a European phenomenon

• No longer only the domain of small pension funds/religious endowments

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Sustainable Investing Rarely Implies Divesting: Being Best in Class within Oil & Gas Can Help Issuers Attract New Money

institutional assets are invested

sustainably

$1 of Every $4

institutional assets are invested

sustainably

$23T

22 22

The “G” is the Most Important Part of ESG: Top

Governance Priorities for Investors

Board Composition, with a particular focus on enhanced diversity

Board-level expertise that is more aligned with business goals

Increased attention to climate risk and the environment

Enhanced attention to talent and human capital management

Compensation that is more aligned with performance and strategy

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4

3

2

5

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In Conclusion How To Craft A Winning Strategy

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In Conclusion: How Should Issuers Position

Themselves to Win?

• Acknowledge past performance as a steward of capital

• Simplify the investment case

• Demonstrate competitiveness relative to stocks in other sectors

• Focus on returns rather than growth

• Cut costs, reduce debt & compensate shareholders

• Be transparent about managing risk for the future

• Stress test around carbon tax and reserves write downs

• Focus on lowering carbon intensity

• Institute incentive metrics that align with long-term strategy

• Increase female representation at board and management level

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Thank You!

Tamar Essner

Director, Nasdaq Energy Capital

Markets

[email protected]

+1 212 312 1344