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Crude at Highest Level Since 2014: Solid FCF for E&Ps

Given that fact that WTI crude oil futures last week surpassed the $90/bbl level for the first time since 2014, we remain constructive with the energy sector for FY/2022 given what we believe will be an elevated price environment for the remainder of the year. Solid fundamentals such as 1) robust FCF yields, 2) generous corporate cash returns, 3) a more conducive regulatory environment for shale (Build Back Better plan on Federal lands and taxes) and 4) the acknowledgment that E&Ps can coexist with ESG investing will provide tailwinds for the sector going forward. As such, we thought to take a look at the senior North American E&P companies and see which have the highest correlation to the price of a barrel of oil (WTI crude oil futures represented by the ticker CL=F).

As can be seen from the above table, all of the senior E&Ps have a positive correlation to the WTI crude oil futures price (this is hardly Earth shattering news) with Canadian Natural Resources (CNQ), Imperial Oil (IMO) and Pioneer Natural Resources (PXD) exhibiting the highest correlations to crude since early 2017 at +0.86, +0.84 and +0.83 respectively. That said, our favored pick from the peer group remains Devon Energy (DVN).

Devon Energy is a leader in returning capital to shareholders with a framework to return 50%+ of excess FCF by way of dividends (current yield 3.7%) and share buybacks. Note that FCF is expected to total nearly $4.0B over the next few years when using a much lower commodity price assumption near the $70/bbl level. In terms of asset quality, improving well performance in Delaware has improved LT capital efficiencies as the company maintains capex allocation flexibility due to strong gas and NGL exposure via the Anadarko Basin assets. Additionally, if there were to be a rotation of investment capital into shale, Devon would be one to benefit the most.

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