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Growth and Equity Outperformance Expected in 2023
Tim Monachello, CFA
We present the results from the fall 2022 edition of our semi-annual ATB Capital Markets Energy Sector Survey. Our survey garnered responses from executives representing 33 energy services companies (down from 44 in our spring 2022 survey), 29 exploration and production (E&P) companies (down from 35), and 32 institutional investors (up from 24). Our survey collection period spanned September 29 to October 12, 2022.
Energy Sector Sentiment Remains Strong
E&Ps and energy services respondents remain highly optimistic regarding the outlooks for their businesses, with roughly 65% of all upstream respondents expecting improving outlooks and activity over the next six months. This optimism aligns with increased confidence regarding the long-term ranges for crude and gas prices in North America. While each major outlook and activity indicator remained materially positive, the survey showed a downtrend from very elevated levels in our spring survey, most notably for E&P respondents, which suggests a moderating of industry sentiment, likely due to a roughly 20% decline in average WTI crude prices since our spring survey period.
2023 Likely to be Another Growth Year for the Industry
The survey showed a consensus view from both energy services and E&P respondents that industry activity should be higher in 2023 compared to 2022. For context, roughly 85% of energy services respondents expect E&P activity to be up in 2023 over 2022, 76% of E&P respondents expect drilling and completions budgets to be up y/y in 2023, and 93% of E&P respondents expect higher production over the next 12 months. Importantly, on average, public E&P respondents in our survey now rank growth as a slightly higher priority than either share repurchases or dividends in their capital allocation hierarchies.
Energy Services Markets Remain Tight
Several indicators support the view that energy services markets remain very tight; both E&Ps and energy services respondents were aligned in their view that energy services pricing has increased and should continue to increase. In addition, nearly half of energy services respondents report that demand is outstripping capacity, and E&Ps broadly ranked access to services and labour as the second-largest risk facing the industry over the next three to five years.
Investors are Increasingly Bullish on Energy Equities and Increasingly Pessimistic on the Economy
Overwhelmingly, 81% of institutional investor respondents expect energy stocks to outperform the S&P/TSX Composite and S&P 500 over the coming 12 months, and none expects underperformance. While 75% of institutional investor respondents expect some level of North American recession over the next 12 months, energy is widely expected to outperform regardless of broad market growth or recession.
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