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Sector Remains Optimistic Despite Choppy Commodities.
Tim Monachello, CFA
We present the results from the spring 2023 edition of our semi-annual ATB Capital Markets Energy Sector Survey. Our survey garnered responses from executives representing 38 energy services companies, 21 exploration and production (E&P) companies, and 25 institutional investors. Our survey collection period spanned from March 28, 2023 to April 12, 2023.
Outlooks Remain Optimistic Though Commodity Price Weakness Has Impacted Sentiment
Despite significant volatility in crude prices, a precipitous decline in gas prices and uncertainty arising from macro economic factors, energy sector outlooks remained positive, though nearly all sentiment indicators softened from our fall 2022 survey. Beginning with commodities, survey takers overwhelmingly believed that both crude and natural gas prices would increase over the next 12-months. Respondents also became increasingly bullish on long-term crude prices, though the long-term view on natural gas prices softened. In regards to business outlooks, 71% of E&P respondents expected outlooks to improve over the next six months, and none expected worsening outlooks. For energy services companies it was more mixed, 39% of respondents expected improving activity levels over the next six months, while 50% expected activity to remain flat. Still, 45% of energy services companies expected operating margins to improve over the next six months, while just 5% expected margins to contract.
Service Sector Supply/Demand Becoming More Balanced
A key insight from the spring survey is that capacity constraints in the energy services sector are easing as supply chains become less congested and activity growth slows. For context, the energy services capacity index turned from positive to negative in the spring survey, indicating that the energy services sector may have shifted on the margin to excess capacity, which aligns with indications from the survey that energy sector inflationary pressures are moderating.
Growth Continues to Move Up Capital Allocation Hierarchy for Public E&Ps
On average, public E&P respondents ranked growth as their top capital allocation priority in our spring survey with an average ranking of 2.3 (up from 2.9 in the fall survey), slightly ahead of debt repayment with an average ranking of 2.4 (down from 1.6 in the fall survey). Importantly though, debt repayment was ranked as the top capital priority more often than growth, but on average growth was ranked higher and was cited as a top-two priority more often than debt repayment. In fact, dividends were also cited more frequently as the top capital allocation priority than growth with 31% of public E&P respondents placing dividends atop their capital allocation hierarchy.
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