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Betting On A Survivor

Around three years ago, in June of 2014, oil began a spectacular collapse. After rising to the point where WTI was fetching over $100 a barrel and holding that psychologically important level for a few months, the market turned. Six months after the rout began the price of a barrel of oil had halved, leaving a lot of companies in a lot of trouble. The hardest hit businesses in the industry were small exploration and production (E&P) companies. Even those that saw it as an anomaly rather than a new normal had worked on assumptions that seemed reasonable or even quite conservative at the time but proved disastrous very quickly. From that point, planning on a long-term average price of around $80 per barrel and borrowing and investing accordingly looked like a too conservative plan if anything.

As prices collapsed, however, even those companies faced a serious problem. Debt levels that looked manageable with oil at an average of $80 now became serious burdens. That situation was worsened by the fact that much of the borrowing had been done to finance land and mineral rights lease purchases that were now essentially worthless. There is no point having a right, and in many cases an obligation, to drill on land where the oil and gas cost more to get out of the ground than you can expect to get for it in the market.

I retell this history, as distressing as it is for most energy investors, to make a point about companies that have survived to this point. Many of them…




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