“Dear Public E&P Companies,
If you haven’t noticed yet, the public equity markets are broken. The price discovery mechanism is not functioning properly due in large part to the growing influence of quantitative and passive strategies, which now represent as much as 85% of daily trading volume in many securities.
As a result, many publicly-traded E&P companies are now trading well below net asset value using the futures strip, which we believe underestimates where oil and gas prices will actually be in the future. Some companies are even trading below the value of their proved developed producing (PDP) reserves. This implies that undeveloped acreage and future drilling locations are worthless.
Here is an idea: do something about it. Allocate capital to the highest-returning use. For many companies, share buybacks now generate a comparable, if not better, full-cycle return than drilling new wells. Move into maintenance mode. Use the free cash flow to buy back stock – a lot of it. Then, allocate more capital to drilling wells when the relative returns justify it...”