Suppose that crude oil, natural gas, and gasoline prices double tomorrow for a couple weeks and then quickly come back down. This naturally has inverse implications for the typical consumer of energy. The past decade was quite an anomaly where investors and companies were willing to give consumers oil at structurally unprofitable levels, but that era is behind us now. The industry is acting more rationally than it was before. Going forward from this point, energy prices don’t even have to keep going up for companies like EOG to continue to generate great free cash flow, maintain a strong balance sheet, and return cash to shareholders.

Many investors divested from oil and gas investments, and those that remained demanded more capital returns to shareholders and better balance sheets. This era caused a lot of capital destruction.Īfter that, oil and gas producers became more disciplined with their capital expenditures, and focused on paying down debt and more prudently growing their production base. During the red period of time, the company (and many companies like it) were aggressively spending on new production that was not particularly profitable, while issuing debt to do so, which investors were happy to finance. The red area represents negative free cash flow, and the green area represents positive free cash flow. The same is true for midstream energy transporters.įor an illustration of that, this is energy producer EOG’s free cash flow and net debt charts, and it shows how troubling the prior decade was for them, and how profitable the current period is for them: If oil and gas prices merely chop around sideways from here for a long time, energy producers would be in great shape financially (after a multi-year stretch of being in terrible shape).

One reason I’ve been structurally bullish on energy stocks is that oil and gas prices don’t even have to keep going up for them to be super profitable from current levels. It’s not just the high price of energy that matters it’s also the time that it remains at high prices that matters.Ī contact of mine recently described this as “the area under the curve”, and I felt that this was a particularly insightful way to phrase it and that a short article on it was worthwhile to share. However, I think a lesser-understood aspect of this current energy and inflation problem relates to time. There’s a ton of focus in financial media about how high energy prices will go, or how low they will fall.

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