Drilling for Alpha in the Oil & Gas Industry

During the recent slide in oil prices, clients frequently asked us which strategies have historically been effective in selecting stocks in declining energy markets. This report answers this question, along with its corollary: which strategies work in rising energy markets? We also explore the value of oil & gas reserve data used by fundamental analysts/investors, but not used in a majority of systematic investment strategies. The analysis in this report should help both fundamental and quantitatively-oriented investors determine how to best use industry-specific metrics when selecting securities from a pool of global oil & gas companies.

Report Highlight Include:

• Strategies that outperformed in falling energy markets favored large capitalization companies with strong cash flows and low capital expenditure (CAPEX) requirements.
• In rising energy markets, companies with attractive valuation multiples and rising analyst EPS revisions outperformed their peers.
• Our results suggest that investors should focus on reserve depletion metrics and on the cost of finding new reserves.
• Strategies constructed using oil & gas reserve data usually have low correlation to popular generic metrics (such as valuation and quality).
• A strategy that combined both industry and generic factors generated returns that were at least 70% higher than those of either the industry or generic strategies.
• The turnover of the strategy based on the combination of generic and industry specific metrics was similar to those based solely on either industry or generic metrics.