能源投资者受益于战略资本配置和股东回报

Thesis: Favor Oily Over Gassy E&Ps in Near Term Despite Gas’s “Coiled Spring” Status....3Attractive Energy Sector....................................................................................................3Oily E&Ps Versus Gassy E&Ps............................................................................................6Our 11 Initiations: 10 Outperform and 1 Market Perform..............................................6Primary and Final Energy Mix Fuels End-Users.............................................................10World Oil Supply and Demand........................................................................................11 SummaryWe believe the energy sector is approaching its latest cyclical bottom, despite a potential surplus in oil and, to some extent, natural gas supply, as investors begin to look past the commodity noise.We are relatively bullish on oil and various related stocks as U.S. inventory deterioration causesdomestic production to decline, offsetting some of the upcoming incremental OPEC+ barrels. Wefind ourselves slightly cautious on natural gas and some related stocks nearer term given the po-tential for increased domestic supply, as new wells continue to improve and baseline productiondecline moderates. However, we do not deny the potential for medium- to longer-term notable We believe there are four key factors that have improved the energy sector’s future potential up-side. First, end-use fossil fuel demand remains strong, with AI and data centers, among others, be-ing prominent sources. Second, most energy companies are in a better financial position than ever.Third, operational efficiencies continue to notably increase. Fourth, capital allocation that includes Our proprietary data suggest quality U.S. oil inventory is declining at a quicker pace than expected,while gas inventory appears to be holding up much better with more consistent inventory levels.We believe the concern over future tier-1 inventory, among other things, is resulting in record-high While the energy sector remains out of favor with many investors due to a myriad of factors, webelieve there are several reasons why investors should consider adding exposure. Despite energy We believe some of the energy group’s upside can be attributed to the macro environment duringthe past five years. The energy group continues to be a relative hedge against inflation, especiallywhen that inflation is driven by rising energy prices themselves. Not surprisingly, the energy sec-tor saw its best annual return over the past five years during 2022, when CPI and other macroinflationary measures were at their uppermost levels, along with the highest oil prices during thesame period. There is much discussion to be had about future inflation, as well as future oil prices, Exhibit 3 While future oil prices may not average in the $90s-$100s as they did in 2022 and 2023, we believemuch of the upstream energy group is in a better position currently than years past. We believe First, the balance sheets are much better today than in past years, with many E&Ps having lever-age well below 1x. The minimal debt enables companies to not only withstand periods of lowcommodity prices, but also become proactive during these pressure periods by acquiring assets, Second, operational efficiencies continue to improve for many E&Ps, with several companies drill-ing as many wells in a year today as in the prior year or two but with up to 33% fewer drilling rigs.Similarly, many of these same operators are fracking as many wells annually as they did a year ortwo ago but with up to a 25% decline in frac spreads. The reduced drilling and completion cycle Third, capital allocation has become more strategic. Operators in prior years would often outspendcash flow to materially grow production. Today, the focus is on strong continued financials, stable Fourth, shareholder return has notably improved. Many companies today pay out as much as 70%of their discretionary free cash flow. The high payout results in strong dividends, with some yieldsas high as 10%, and opportunistic stock buybacks that notably improve companies’ per-share met- While we are slightly cautious on oil and natural gas prices in the near term due to potential macrooverhangs that we will touch on later, we believe investors should soon start adding various oil to various gassy E&Ps. Much of the disparity can be attributed to investors’ belief in future secu-lar natural gas demand growth versus potential oil pricing pressure. Though we also anticipatestrong future nature gas demand with more moderate oil demand, we believe current stock pricesare overestimating the changes. We looked at the oil-weighted Goldman Sachs index (GSENOILB)versus its natural gas-weighted index (GSENNATG) over the past 10 years. We found the spreadbetween the two indices peaked approximately a month ago, though the difference remains mate- We are initiating coverage on 11 E&Ps with 10 Ou