Investing in Energy: A Primer on the Economics of the Energy Industry

Leverage Creep

First quarter 2009 earnings set the stage for what was arguably the most challenging year the oil and gas sector had seen in the previous five years. The market expected an equally lackluster 2Q 2009 earnings, with crude prices that were on target to post another 56 percent decline below 2Q 2008 levels. With crude oil trading in the $55 to $65 per barrel range, the dramatic collapse in crude oil prices clearly affected both revenues and earnings of global integrated oil majors, resulting in continued project rationalizations.

How quickly and to what extent oil companies can reduce cost structures in the face of what was the steepest earnings decline in five years remained to be seen. While retrenchment in the industry was not expected, ...