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.
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. That’s the highest level of spending per quarter since 2018, and the 10th consecutive quarterly increase.
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. According to the World Future Energy Summit, 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.”
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.
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.
 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
 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.
 U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=57361
 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
 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.
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