The energy sector has a major balancing act on its hands. Just as companies ramp up spending in what is likely to be one of the largest investment cycles in decades, they must demonstrate to investors that these capital investments will create long-term value. This task is especially difficult considering that despite recent momentum, over the past decade, the sector has struggled to break out from the broader market.
Yet, BCG’s Center for Energy Impact recently analyzed energy companies’ total shareholder return (TSR) and found that value creation throughout a full economic cycle is in fact achievable for companies in the major energy peer groups.
According to our 2026 survey, energy investors consistently reward companies that strike the right balance among four priorities: investing for growth, returning cash to shareholders, limiting shareholder dilution, and maintaining a strong balance sheet. (See “About Our Research.”) As the sector enters a major new investment cycle, getting those tradeoffs right is essential.
About Our Research
The TSR analysis covered 70 O&G companies representing $4.5 trillion in market capitalization and 74 P&U companies representing $2.6 trillion in market capitalization. We divided them into 13 peer groups. (See the exhibit.)
The Pressure to Perform
The energy sector is forecast to invest approximately $7.5 trillion over the next five years, 25% more than it did from 2021 through 2025 and 63% more than from 2016 through 2020. Power and utilities (P&U) companies are rapidly increasing capital investment across the value chain—from generation to distribution—to meet the unprecedented demand for electricity that is being driven mostly by the growing use of AI. Oil and gas (O&G) companies, meanwhile, are investing to strengthen supply resilience (as geopolitical events disrupt markets) and to extend portfolio longevity (as underlying resources decline).
The new investment cycle will increase the burden on energy companies to demonstrate per share value creation, while they simultaneously compete with other capital-intensive sectors for investor capital.
Energy Versus the Broader Market. The path to investors is arguably more challenging for the energy sector, which hasn’t been able to outperform the broader market over the past decade despite waves of strong performance. (See Exhibit 1.) This is true even if we discount the outsized impact that a small number of technology companies have had on market returns.
Market Performance Within the Energy Sector. Within the energy sector, the performance of different peer groups over the past decade has varied widely. (See Exhibit 2.) Independent power producers (IPPs) have been the top performers, with a median ten-year annualized TSR of 23%—nearly double the market’s—because of load growth (increase in electricity demand) driven by AI data centers. IPP returns were nearly triple those of exploration and production (E&P) companies, which trailed the sector at 8%. Notably, E&P companies’ market performance was subpar even though crude oil prices nearly doubled during this period. Clearly, higher crude prices lifted E&P earnings, but the increase did not translate into higher shareholder returns because of declining valuation multiples and equity dilution resulting from M&A activity.
Not far behind IPPs were downstream O&G companies, with a median ten-year annualized TSR of 16%. The above-market returns can be attributed to a prolonged period of elevated refining margins as well as to moves to divest peripheral businesses and return sale proceeds to shareholders.
Different Risk-and-Return Propositions. Each peer group attracts investors for different reasons. (See Exhibit 3.) Utilities that are regulated offer predictability. E&P offers leveraged exposure to oil prices. And midstream and integrated O&G companies sit in between, with volatility closer to that of several utility peer groups. A company’s performance, therefore, should be judged against the risk and return proposition investors expect from its particular business model.
Market Performance Within Individual Peer Groups. Our TSR analysis found that performance also varied widely within each peer group. Across peer groups, there was, on average, a difference of 6 percentage points in annualized returns between companies in the 75th and the 25th percentiles over the past decade.
So, while peer groups set the starting conditions, the wide range of market performance within individual groups shows that company-specific choices and execution matter substantially. They matter both to TSR, which reflects value already delivered, and to valuation multiples, which reflect expectations of what the company will deliver next. Neither TSR nor valuation is simply determined by the peer group.
As energy companies enter a new investment cycle, what do they need to do to earn the support of investors?
How O&G Companies Can Achieve Top Performance
The O&G subsector typically alternates between cycles of outperformance and underperformance. It underperformed during the periods from 2016 through 2019 and from 2023 through 2025. And it outperformed from 2020 through 2022, and again starting in early 2026.
The higher prices of oil, gas, and products in the current economic cycle have provided O&G companies with higher earnings, cash flow, and TSR. Yet investors have not responded with premium valuations. Even the largest O&G companies, which are experienced at navigating cyclical turbulence, are trading below adjacent cyclical sectors. The ten largest O&G companies trade at approximately 6 times earnings, while the ten largest materials and industrials companies trade at approximately 12 times and 22 times, respectively. (See Exhibit 4.) That’s primarily because investors tend to view strong financial performance as cyclical, not structural.
Five Strategic Imperatives for O&G
BCG’s 2026 CEI Investor Survey surfaces the tension at the center of the O&G subsector's capital agenda. Nearly three-quarters of investors want O&G companies to reinvest in growth, but only one-third believe that the financial discipline demonstrated recently represents the lasting, fundamental shift needed to earn sustainable premium valuations. To attract investors, O&G companies across peer groups need to follow five strategic imperatives.
Make the long term credible. Most enterprise value in capital-intensive sectors comes from cash flows beyond the next five years. For the materials and industrial companies, as well as the hyperscalers, long-term cash flows constitute most—84% to 92%—of enterprise value, compared with only 67% to 73% for O&G producers. (See Exhibit 5.) The one exception: midstream O&G companies. Their enterprise value of 84% can be attributed to the prevalence of long-term contracted cash flows.
O&G companies should give investors greater visibility into what will generate returns a decade from now, as well as the specific steps for achieving them. This will help strengthen investor confidence in the long-term earnings trajectory that supports today’s valuations.
Preserve strategic options throughout the cycle. As BCG’s research on cyclical industries has shown, capital deployment in cyclical industries tends to be procyclical, with companies investing and acquiring most aggressively near cycle peaks.
Companies should not let portfolio gaps force them into allocation decisions that at the wrong point in the cycle, when liquidity is scarce or costs are high, can destroy value. A strong balance sheet gives companies the flexibility they need to make allocation decisions when the time is right.
Don’t let shareholder distributions become the adjustment mechanism. Our analysis found that top performers are much less likely to cut their dividend payouts during a downturn. Moreover, dividend cuts are strongly associated with long-term underperformance.
Investors reward companies that establish payouts that can be sustained through the cycle; a resilient balance sheet gives management room to protect distributions through a downturn. Companies, therefore, should establish payouts that can survive the cycle, not just the good years.
Take a brutally honest view of portfolio quality. Production decline is inevitable—O&G extraction is depleting resources, and portfolios require continual reinvestment. For most O&G companies, a decline in production volumes will create a material replenishment challenge (more than 20% and, in some cases, more than 60%) until 2040.
Where companies reinvest capital—and the quality of the resources that investment makes accessible—will determine long-term value creation. Better assets create a virtuous cycle, generating more cash that enables debt reduction, reliable distributions, and more high-return investments. Top performers offset natural production declines with new lower-cost, higher-margin production, thus steadily improving portfolio quality.
High-risk assets must earn comfortably above the cost of capital. The higher the risk, the higher the return the asset should deliver to justify the capital allocated to it. Since, for example, E&P has the highest volatility of any O&G or P&U peer group, so returns need to be very high to attract investor attention. But this has not happened: E&Ps have one of the lowest ten-year TSRs in the sector.
Companies should bear in mind that assets with greater commodity, execution, or portfolio risk create value only when the expected returns more than compensate investors for bearing that risk. For this reason, companies should apply higher return thresholds to riskier investments rather than using a uniform hurdle rate (minimum required return) for all capital projects.
How P&U Companies Can Achieve Top Performance
Within the P&U subsector, different peer groups are navigating very different cycles. IPPs that are selling power into wholesale markets have seen their valuation multiples rise owing to AI-driven load growth that has pushed power prices higher. Utilities that are regulated have delivered the steady returns that their lower-risk model is built to produce. Renewables developers have benefited from growing demand while contending with rising costs of capital and policy volatility.
But, regardless of peer group, P&U companies must deploy capital at record levels while proving to investors that these expenditures will create value. (See Exhibit 6.) Investors are asking companies to demonstrate both balance sheet discipline and confidence in capital deployment. Capital project delivery and balance sheet discipline were the two most frequently cited signals of best-in-class utility management in our survey. They are asking companies not to invest less—but to carry a larger capital program that is financed in a way that preserves value.
Five Strategic Imperatives for P&U
Five imperatives apply across the P&U subsector, though the importance of each depends on a company’s specific business model.
Convert growth into per share value via efficient funding. As growth expectations have risen, so have funding needs. But growth funded by continuous equity issuance is a persistent drag on TSR—a common challenge for utilities and renewables developers. Companies able to unlock efficient sources of funding, whether through innovative financing models, strategic partnerships, or optimized capital structures, can enhance their ability to create higher per share value.
Preserve balance sheet capacity and strong credit ratings. Credit quality has declined across the subsector as companies stretched balance sheets to meet greater capital needs. Consider US utilities as an example. In 2018, 34% received an S&P rating of A-minus or above, compared with 19% in 2025.
This makes it essential to treat balance sheet capacity and strong credit ratings as strategic assets in their own right. That discipline will help ensure that companies have the headroom to absorb the impact from unforeseen events, including adverse regulatory outcomes, project delays, and wildfires, while maintaining the flexibility to act when the opportunity is best.
Make capital plan delivery a differentiating capability. Utilities are being asked to deliver increasingly large and complex projects simultaneously. No wonder investors ranked execution credibility on announced capital expenditures as the number one factor distinguishing top-performing regulated utilities from their peers. Investors also said that capital project delivery is one of the most credible signals of management quality. (See Exhibit 7.) This is no easy task: fewer than 1% of capital projects worldwide are completed on time and on budget and deliver the value originally promised.
Proactively mitigate major risks, such as affordability and wildfires, before they are priced into shares by the market. Rising utility rates have made affordability a top political concern, leading to intensifying regulatory and political intervention that has impacted the financial performance of some utilities.
Utilities must develop robust affordability strategies that preempt intervention. These include driving meaningful improvements in operational efficiency and cost structure (operations and maintenance, excluding fuel, accounts for roughly 20% of a utility’s revenue requirement, on average), making use of nonwire alternatives for grids, and aligning with regulators on rate design to ensure the revenue requirement is fairly translated into customer rates.
A proactive approach is also essential for mitigating the risk of wildfires, which has resulted in persistent valuation discounts for utilities in fire-prone regions. Grid modernization, vegetation management, predictive risk modeling, and engagement in developing wildfire liability and cost-recovery mechanisms are all effective ways to manage wildfire risk.
Shape the portfolio from a position of strength. Deliberate portfolio moves such as M&A and divestitures can significantly create the value that investors reward, while reactive moves such as forced divestitures at depressed valuations can significantly destroy it. The window for reshaping a portfolio closes at precisely the moment the need for reshaping becomes obvious.
The P&U subsector has a mixed track record of value creation from deals for exactly these reasons; any portfolio-shaping deals must be intentional, proactive, and linked to a clear value-creation strategy.
Despite very different business models, economics, and investment cycles, the challenge for companies across the energy sector is increasingly the same: deploying substantially more capital while demonstrating that investment will create durable per share value. The companies that can do so while preserving balance sheet resilience and strategic flexibility will be best positioned to earn investor support through the next economic cycle.
