In recent years, oil and gas companies have disappointed their investors, and now, they must do everything they can to undo the damage, according to a new report by Boston Consulting Group (BCG), titled Value Creation in Oil and Gas 2019: Winning Back Investors' Trust.

The report details the factors and forces beyond the companies' control—including oil price weakness and volatility—that have weighed on the firms' ability to generate strong total shareholder returns (TSRs). Nevertheless, companies can take steps to regain investor confidence, even in a difficult external environment.

"Overcoming the investor trust deficit is imperative for oil and gas companies," said Rebecca Fitz, a senior director at BCG's Center for Energy Impact and coauthor of the report. "Restoring their once-strong relationship with investors is critical if the companies hope to be assured of sufficient capital and to gain more flexibility in making capital allocation decisions."

Divergent Performance by Subsector

The report notes that, while the past few years have seen the broad oil and gas sector struggling more than other industries on the TSR front, TSR performance among oil and gas subsectors has varied considerably. Refining and marketing companies' performance was particularly noteworthy over the five-year period—2014 through 2018—that BCG studied. These businesses, propelled by strong margin expansion and relatively strong earnings growth, led all subsectors. International players did especially well, many benefiting from their access to emerging markets that are characterized by strong demand for fuel.

In contrast, many companies in the exploration and production subsector, especially those with significant North American exposure, were weighed down by the weakness in oil prices over the five years and investor concerns about the companies' ability to maintain capital discipline. Other noteworthy laggards over the five-year period were midstream companies, which provide processing, transportation, and storage of oil, natural gas, and natural gas liquids through pipelines and terminals. Despite strong revenue growth, many of these companies had to work hard to generate compelling TSRs over the five years.

The sector's supermajors have improved their TSRs modestly but remain challenged owing to the plunge in oil prices. Still, the companies did what they could to buoy their TSRs, including increasing payouts to investors.

"The combination of worries about external factors and doubts about the sector's stewardship of capital has created a vicious circle," said Matthew Abel, a BCG partner and one of the report's coauthors. "The more uncertain the environment, the closer investors' scrutiny of companies' capital allocation decisions and the greater investors' demand for immediate evidence of investment returns, for example through dividends."

Getting Back onto the Right Path

To win back investors, oil and gas companies will need to align their business, investor, and financial strategies; maintain capital discipline; maximize free cash flow; diligently manage their portfolios; aggressively embrace digital technologies; appropriately benchmark their TSR performance; and determine the optimal balance between dividends and buybacks in shareholder payouts.

Winning companies will also make sure that they have the right mix of investors—those whose investment objectives are in sync with the company's business objectives. Such companies will place heavy emphasis on meeting the expectations of practitioners of environmental, social, and governance (ESG) investing, who stand to become an increasingly powerful influence on the sector's share prices.