For the past few years, the energy sector has had high capital expenditures (capex). According to S&P Global, the global energy sector capex was more than $1.5 trillion in 2021[1].
And in Q1 of this year, a report from Evaluate Energy found that 87 U.S. and Canadian domestic-focused oil and gas companies deployed roughly $25 billion in Q1[2]. That’s the highest level of spending per quarter since 2018, and the 10th consecutive quarterly increase.
See more: “Why Free Cash Flow May Be the True Measure of a Company’s Value”
Typically, companies with high capex tend to have a tough time generating high free cash flow (FCF) yields.
“Traditionally, energy companies have overspent on capex, which has caused the sector to generate less FCF than other sectors,” said Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions.
The Tide Is Turning: A Surge in Efficiencies
But things appear to be changing in the energy sector. Recent declines in crude oil prices and oil rig counts suggest that capex could decline in the coming quarters[3]. According to the World Future Energy Summit[4], more oil and gas companies are using a wide range of technologies and solutions to become more sustainable and reduce costs.
“With the belief that oil demand may be finite, [energy companies are]being more cautious about their spending,” Mack said. “So now, they’re being more efficient.”
He added, “In the past, we’ve seen those companies in the energy sector prioritizing the pursuit of growth. Recently, there is a larger focus on being productive and finding efficiencies. This has resulted in a record amount of FCF being generated in the sector today[5].”
VictoryShares believes that when companies spend prudently, they can generate more sustainable levels of FCF. And U.S. companies with high FCF are what the VictoryShares Free Cash Flow ETF (VFLO) targets.
The Fund seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index. The underlying Index incorporates both trailing and forward-looking FCF metrics into its methodology. Ultimately, it selects companies offering the highest free cash flow while exhibiting above-average growth potential.
For more news, information, and analysis, visit the Free Cash Flow Channel.
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
Notes
Capital expenditures (capex) are the payments with either cash or credit to purchase long-term physical or fixed assets used in a business’s operations.
Free cash flow (FCF) is the cash remaining after a company has paid its expenses, taxes, interest, and long-term investments.
[1] S&P Global Commodity Insights, “Global energy sector capex poised for a strong rebound” https://www.spglobal.com/commodityinsights/en/ci/research-analysis/global-energy-sector-capex-strong-rebound.html
[2] Evaluate Energy, “Upstream capex hits five-year high despite significant cuts to cash flow in U.S. and Canada” https://blog.evaluateenergy.com/united-states-canada-upstream-oil-gas-capex-hits-five-year-high-q1-2023. The data excludes all M&A activity.
[3] U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=57361
[4] World Energy Summit, “8 ways the Oil and Gas Industry is making better use of sustainable technologies” https://www.worldfutureenergysummit.com/en-gb/future-insights-blog/8-ways-the-oil-and-gas-industry-is-making-better-use-of-sustainable-technologies.html
[5] As represented by the Victory U.S Large Cap Free Cash Flow Index’s energy exposure of 22.97% on 6/30/2023, near historical highs.
Disclosure Information
Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.
All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The Fund invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors.
Additional Information
Derivatives may not work as intended and may result in losses. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
20240118-3325903