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Investing Topics: Crude Oil

RIsk Assessment: US Oil and Gas Producers

When most investors look to profit from the North American energy boom, their thoughts immediately turn to the exploration and production companies and their huge output growth.

However, weaker oil prices mean that this paradigm has shifted; at this stage in the cycle, exploration and production companies will face the challenge of living within their cash flow.

Now more than ever, investors will focus on upstream operators’ balance sheets and rates of return, as opposed to huge production growth.

The Oil Down-Cycle: Lessons from the Past

US oil prices would need to overshoot the levels supported by prevailing supply and demand conditions to prompt producers to idle rigs and reduce capital expenditures dramatically. Weak balance sheets and higher-cost asset bases will compel some operators to scale back.

This supply response in the US and elsewhere will signal that we’re near the bottom of the commodity cycle. The question investors must ask isn’t whether this will happen, but rather how long this process will take to occur.

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