As previously documented on BRIIDGE, the reopening of economies, coupled with rampant inflation and later geopolitical tensions that strained alternative energy sources, significantly boosted demand for Oil & Gas investments. This surge drove stock prices beyond the historic low valuations observed at the onset of the pandemic.

Over a three-year period following COVID-19, the sector’s relative positive performance against the benchmark exceeded 200%, as evidenced by the Oil & Gas Exploration & Production industry.

Fig 1: Performance 1YR Horizon

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Fig 2: Sales Growth [1YR Rolling]

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However, more recently, the sector has underperformed relative to the broader market. This decline is attributed to several factors: falling inflation due to tightening monetary policies, government initiatives to diversify energy sources, efforts to reduce dependence on Russian gas, and increased gas storage capacity.

Over a 12-month period, the Oil & Gas Exploration & Production industry and the Oil & Gas Drilling industry have lagged the broader market by 40% and 55%, respectively. In contrast, the past four quarters have shown a different trend for the Oil & Gas Midstream industry—a subsegment focused on processing, storing, transporting, and marketing oil and natural gas.

While its sales growth has been moderate compared to its peers during the peak of geopolitical tensions, the Midstream industry benefits from more stable fundamentals. A key distinction lies in its higher leverage, necessary for infrastructure development and maintenance, as reflected in a debt-to-equity ratio nearly three times higher than its Exploration & Production and Drilling counterparts.

This high leverage has made the Midstream segment more sensitive to interest rate changes, partially offsetting the industry-specific factors that have contributed to the relative lag of its peers.

Fig 3: Operating Margin [1YR Rolling]

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

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As monetary policy shifts toward easing, this sensitivity is expected to reduce the debt burden, leading to improved margins. Additionally, factors such as lower margin volatility, a higher dividend yield, and steady growth in free cash flow have contributed to lower stock price volatility and better relative performance over a two-year period, despite minor underperformance against the market.

As monetary policy continues to ease, these specific industry factors, combined with escalating geopolitical tensions, could create conditions for medium-term arbitrage opportunities across industries within this sector

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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