Following years of poor market performance due to highly cyclical fundamentals, investors' appetite for companies in the Oil and gas Industry reached a new low on the eve of the pandemic.

With depressed valuation levels evidenced by a median price-to-sales ratio below 1 or single-digit price-to-earning ratios at the height of the pandemic, the industry's resurgence since then has, however, been spectacular, Outpacing the broader market by several hundred percent.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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With current valuation levels on par with historic norms and deteriorating fundamentals, could a meaningful correction be in sight?

In 2021, as the median sales growth rate topped 90% on the back of a global economic rebound, fuel shortages, and inflation, the gross profit margin surged above 50% from 20%, and free cash flow reached its highest level in a decade. Investors rushed en masse to invest, undeterred by cleaner energy initiatives, further accelerating market returns.

Additional tailwinds, including the war in Ukraine, caused demand to skyrocket, further straining production capacity and driving oil prices above $100 for the first time in over eight years.

As the energy crisis subsided following government initiatives to diversify energy sources and suppliers and increase gas storage, reducing dependence on Russia, demand cooled, and oil prices dropped to a more manageable level.

Recently, a moderate regain in momentum for clean energy underscores the cyclical nature of oil and gas companies.

Fig 3: Operating Margin [1YR Rolling]

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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

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While sales growth flattened for the four quarters ending Q1 2024 for utilities-renewables, oil and gas companies recorded a double-digit drop.

Although they maintain a highly profitable bottom-line margin, the negative delta from a year prior highlights the declining trend.

While returns have been in line with the broader market over the past two years, the PE ratio has halved over this period due to lower bottom-line figures.

Fig 5: Net Income Margin [1YR Rolling]

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Fig 6: Performance [1YR]

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Fig 7: Dividend Yield

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Fig 8: Net Debt To Ebitda [1YR Rolling]

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