The spectacle of negative oil prices presages delinquency and default, cuts to production and investment, plummeting cash flow and the slashing of dividends across the energy industry. But we are beginning to sift through the ashes for opportunity. Supply cuts, the aggressive decline rates in the US and a hiatus on investment suggest we might see the market rebalancing next year.
In which case long term oil prices are likely to rise, or at the least, remain above the marginal cost of production (>$50 per barrel.) For companies with scale, long lived assets, good hedging, strong balance sheets and low costs, companies that can survive this storm, there are happier days ahead.
US gas producers stand to be some of the greatest beneficiaries of declining oil drilling activity. About 40% of US gas production is a by-product of oil production.
Although there are opportunities for careful stock pickers, volatility will remain high as the whole sector is being starved of cash; adjust position sizes to match conviction.
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