Now comes a key part of the top-down investment process: identifying and analyzing portfolio drivers. In general, the basic business operations within each Energy sub-industry don't vary much; as a result, high-level sub-industry drivers tend to affect peer groups similarly and very often determine performance dispersion among the sub-industries.
However, drivers will differ in relative importance depending on the sub-industry. For example, while commodity prices affect all Energy firms to some degree, upstream firms are more directly affected than others. In the remainder of this chapter, Fisher Investments will list and discuss main drivers and explore how each sub-industry might affect others.
Oil & Gas Production Growth
Fisher Investments believes increasing production growth is vital for Integrated Oil & Gas firms. However, absent a large acquisition, the sheer production volume from most Integrateds makes it unusual to report large year-over-year production growth. So most integrated firms target a modest 1 to 4 percent annual production growth, and many find even that to be challenging.
Production growth, reserve replacement, and new discoveries are significantly more important to pure E&P firms than the big Integrateds due to their relative size. Without the same vast, globally diverse reserves of the Integrateds -- as well as downstream assets -- upstream results make or break E&P company earnings. It's not uncommon to see E&P firms report strong double-digit, year-over-year production growth or, conversely, big declines.
Fisher Investments believes the importance of production growth comes down to size and reserves. For smaller E&P firms -- including private ones -- there's a much higher degree of business risk because success depends upon discoveries or acquisitions. Larger E&Ps tend to have big resources and geographic diversity, thus creating less variability in production growth.
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