With global trade tensions driving lower growth expectations and OPEC’s continued push for more output, it’s been a challenging year for crude oil and in turn, a challenging year for the Canadian oil & gas basket (>30 names).

Segmenting the producers by seniority paints a clearer picture, with the exploration-focused names impacted more than production-focused companies…

… and gas names typically outperforming oil-heavy producers.

Oil field services have faced the brunt of the impact though, as expectations for less drilling activity and shut-ins temper backlog expectations.

Using past downturns as a fundamental guide

It’s not the first time we’ve seen oil prices struggle, with a brief but violent downturn during the pandemic and a more prolonged lull in 2015, where prices fell below typical breakevens for producers.

In both periods, capital investment slowed dramatically…

… profitability flipped negative…

… and most companies were forced to turn to layoffs, dividend cuts, buyouts, and equity markets to stay afloat.

What’s different this time?

Should the lid stay on crude oil prices for longer, companies participating across the Canadian energy patch would be entering this new regime in much better financial standing, after reducing leverage drastically over the years.

That means they’ll be less reliant on equity markets for funding compared to 2015, and may have the capacity to continue buying back shares at current prices.

The longer prices stay put, the more likely we are to see history repeat - with material layoffs, dividend cuts, and M&A all on the table. But there’s a pretty compelling argument to be made that an oil rebound could be in the cards.

Ignoring the potential for a trade resolution, inventories sit well below the average over the past 5 years…

… and the geopolitical environment remains frothy, with tensions between India and Pakistan escalating recently to add to the list of ongoing conflicts. Combined with this outlook from the CEO of Diamondback Energy…

… there could be potential for a narrative shift in oil markets.