There are tremendous opportunities at hand for energy companies. To seize these opportunities, however, they will need to engage in a disciplined, forward-thinking approach that emphasizes vision. Those who can look through the current economic storm in a strategic manner will be at an advantage when the inevitable economic recovery occurs.

Where are we now?

It’s old news by now. America is in the midst of one of the worst economic downturns in its history. Oil demand and prices have reached new lows, marking the sharpest commodity price declines in history, an unprecedented 75%.

The severity of our situation can be attributed to the cascading effect of the current economic crisis. What started in the US with the collapse of the housing market and affiliated banks quickly spread through global economies.

For the energy industry, the fall was made all the more dramatic by the climax that preceded it. Mid-year 2008, crude prices hit an all-time high at almost US $150 per barrel. By December, prices were down to less than one-third that amount.

While the cost of a barrel of crude rose dramatically, so too did the cost of doing business. Operating costs rose at a rate of about 15% to 20% per year over the last five to seven years. Finding and development costs also rose by more than 20% per year. We are only now starting to see this upward surge in costs abate.

What’s next?

Ernst & Young’s recent peek into past pricing peaks and valleys revealed that — if the past is any indicator — prices could soon stabilize. Previous commodity price downturns lasted an average of 73 weeks. We may be more than halfway through this cycle at 40 weeks (as of April 1).

Today’s oil and gas producers are in a good position to seize opportunities when the time is right. Compared to the recovery of the 1980s, today’s industry is much leaner, more efficient, and better positioned to take advantage of opportunities during an economic recovery.

To take advantage of the eventual recovery, Ernst & Young offers the following priorities for oil and gas producers:

Stay on track. Sustained E&P activity will help offset pricing shocks in the next up cycle. Producers would be wise to “drill through the storm,” preserve what they have, and protect their most valuable asset – their people. Retaining top talent will pay dividends in the long term as nearly half of today’s O&G workforce will retire in the next five to 10 years, leaving behind a small number of younger workers (only 15% of today’s oil and gas workforce are in their 20s and 30s).

Cash is king. Now is the time for strong cash management; the need to have cash on hand cannot be overstated. Pay close attention to debt maturity schedules, bank covenants, cash on hand, and capex flexibility. And exercise traditional financing methods. Volumetric production payments and other mineral conveyance opportunities familiar to oil and gas companies can be resurrected to fund exploration, development, and production.

Keep your eye on the green. The current state of the global economy has nay sayers arguing that economic reality will kill the budding alternative energy industry. Given the priorities of the new administration and the ever-dwindling number of accessible sources of traditional fossil fuels, investing in renewable and alternative technology is a sound long-term strategy.

One thing is true of all recent recessions. In the end, a new economy developed, bringing with it a new era of prosperity. In 1987, the Asian economies were the first to recover from financial collapse and helped revitalize the overall economy. In 1998, there was the dot-com explosion. Then the housing boom of 2002 ushered in a new era of prosperity.

The O&G industry can do its part to be prepared to fuel the new economy that will emerge in, quite possibly, the near future.

The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.

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