RE:RE:RE:NR Jan 31/22 thoughtsCovid was an example of worst case senario.
What happenned?
OPEC cut production enough to balance the market.
In a worse case senario oil companies can stop drilling, and sell what they produce. ie, do what they do during break up - just keep doing it until the situation reverses.
Oil companies invest at the start, and receive sales revenue thereafter. They are not like manufacturing companies that spend a certain amount to make every unit they sell, such that if their selling price falls below their manufacturing price, they are done.
In that regard, oil companies are better suited to survive worst case senario than is generally understood.
The main risk to an oil company from a worse case senario is their ability to service their debt.
All these oil companies have much less debt than they did going into covid - and are therefore much better able to get though a worse case senario.
Ironically, if you owe a bank $1000, and can't pay the interest, thats your problem. However if you owe a bank $100 million and can't pay the interest, thats their problem! In such situations, lenders typically work with borrowers to find a solution.
In the oil sector, that means the banks tell the oil company in default that they must sell themselves to someone else. That someone else is another oil company that is able to service their own debt. Whenever you hear a mgmt team say they are considering "strategic alternatives" that is what they mean.
BNE and OBE are two completely different companies when it comes to corporate strategy. One is trying to win the race, and the other is just trying to finish. Chances are both will cross the finish line. One may just do it much faster than the other.
I get the feeling OBE runs circles around BNE strategically.
As for best and worse senarios - yesterday was an important day for oil. The US Fed essentially said they are at or near the end of their interest rate increases (Powell said he can see deflation has started).
Much of the decline in oil that started mid 2022 was a result of investors thinking that raising interest rates would cause a recession - which would then cause reduced oil demand. Right or wrong, that idea let all the air out of the ballon.
ie oil started trading with a recession discount.
Here we are today, with interest rates at or near their tops (Canada and UK have paused, EU and US are very close to pausing), and a recession hasn't happenned. Instead it looks like a soft landing.
That is a fantastic story for oil. It may not show in the oil price just yet, but that recession discount will come out of the oil price.