Energy firms' performance dispersion and their recovery since 2015: The opportunity for small-cap value reversion

Abstract

A dive into the inner workings of small-cap energy firms and their performance from 2015 to present. How have these firms suffered and why? The focus of this research is to discover if there is an opportunity for these firms to recover and revert towards their historical performance relative to large-cap firms and the WTI Crude Index. Focusing on the events of 2015, macro tailwinds, and the industry as a whole, I hope to discover the fate for small-cap energy firms as a result of their history in 2015.

Prior to 2015, many energy companies with heavy exposure to oil have been relatively successful. The ability for these companies to have flexibility in their cost structure provided by the existing oil prices allowed firms to continue expanding, researching, and developing new capabilities. With the price volatility that occurred in 2015 and the newly established relatively stable price has prompted record number of companies to file for chapter 11 bankruptcy and restructure. This paper is intended to analyze the new landscape these firms are competing in and determine whether they are in a position to sustainably compete within the market.

These companies' performances since 2015 have varied greatly from the few that were barely affected to those that were liquidated completely. The noticeable trend in the firm's sub-industry and size brings questions to the table that imply a new normal may have been established. Will companies that have had weaker performances, in regards to the total return in the market, continue to lag behind, or do they offer an attractive opportunity for value investors?

Though there has been turbulence in the market due to the economic effects of COVID-19, this report does not extend into the current market, yet it is highlighted in the outlook section of this report. The time frame of this report is predominantly from 2015 to late 2019, with a brief outlook on the economic environment in 2020 and its impact on the study.