How Productivity Enhances FCF in the Energy Sector

The energy sector has seen significant productivity gains in recent years, positively impacting the sector’s free cash flow (FCF) generation.Investors may examine a company’s FCF to assess its financial health and quality. FCF is the cash left over after a company has covered its expenses. It is used in various ways, such as paying down debt, issuing dividends, and investing in growing the business. Historically, energy companies have leaned into prioritizing growth at the expense of FCF. The shales’ boom in the early years saw rapid production gains, which triggered a sharp fall in oil prices. In response, oil and gas producers have shifted to a model of restrained growth and increased efficiency. This shift in focus toward productivity and discovering efficiencies marked a pivotal change in the industry. Energy companies now generate substantial FCF relative to other sectors. After years of slow growth, a few different drivers have led the oil and gas space to see persistent productivity gain.Technological AdvancesThe innovation of technology available in the sector drives productivity gains for oil and gas producers. Many drill bits are now autonomous with the inclusion of electronic sensors, which allow the bits to steer themselves. According to Bloomberg, this enables computers to identify the optimal course through rock layers and to self-correct in about a minute. In comparison, it would take a human more than 10 minutes to change the trajectory. Additionally, improved software can help drill bits stay in the biggest oil pocket, further enhancing productivity.M&A in the Energy SectorMergers and acquisitions (M&A) have been a key theme in the energy industry in recent years and are reducing the number of workers needed in U.S. oil fields. Per Bloomberg, drilling a distance that would have taken three years to complete a decade ago now takes one year. Higher efficiencies have led energy companies to profit from lower crude prices. Permian operators needed crude prices above $70 a barrel to make a profit in 2014, according to Bloomberg. However, these operations are now profitable when crude is around $40 a barrel, even as they expand to less favorable geologic formations, according to S&P Global Commodity Insights. The U.S. Bureau of Labor Statistics forecasts oil and gas extraction will see some of the fastest output growth across industries over the next decade. This creates a unique opportunity for energy companies in the years ahead. The VictoryShares Free Cash Flow ETF (VFLO ) may be a solution for investors looking to capitalize on the productivity gains in the energy sector. The ETF provides exposure to companies with high FCF yields. This is why the ETF currently has an overweight to the energy sector compared to the benchmark Russell 1000 Value Index. For more news, information, and analysis, visit the Free Cash Flow Channel VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.Disclosure Information Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit //www.vcm.com/prospectus. Read it carefully before investing. All investing involves risk, including the potential loss of principal. All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The ETF invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions The ETF could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. Derivatives may not work as intended and may result in losses. If a seed investor redeems its shares, it could negatively impact the Funds’ NAV, market price and brokerage costs. Additional Information Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies. The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Effective on or about February 28, 2025, Foreside Fund Services, LLC (“Foreside”) will no longer serve as the distributor to the VictoryShares ETFs. Victory Capital Services, Inc.(VCS) , an affiliate of the Fund’s adviser, will replace Foreside in this capacity. VCS and its affiliates are not affiliated with Foreside. 20250128-4173671