“Just one year ago, we wrote about the need for E&P management teams and boards to become more returns-focused. Indeed, since the start of the shale revolution, the industry has spent too much capital on projects that have generated unacceptable returns. Making matters worse, a significant portion of that capital was financed with debt. In order for companies in the sector to compete for capital with other industries going forward, they need to generate much higher returns on capital, create economic value on a debt-adjusted, per-share basis, and eventually return capital to shareholders as shale oil and gas plays mature over the next several years.
In addition, we outlined the important role that investors should play in promoting and rewarding valuecreating behavior in the E&P sector. Historically, investors have allocated capital in a pro-cyclical manner, rewarding profitless growth during periods of cyclical strength, and not holding management teams and boards accountable for value-destructive behavior during downturns.
For their part, publicly-traded E&P companies have made real progress in improving their business models in an effort to generate better shareholder returns. We believe that these changes are underappreciated by most investors, many of whom appear more concerned about short-term performance and macro factors than the important structural changes that are occurring within the energy industry...”