This month the oil industry loses a great leader when Charles (Chuck) Davidson steps down as executive chairman of Noble Energy Inc. after being at the helm of the Houston E&P company since joining it in 2000. Previously he had led Vastar Resources Inc. (where he was chairman, president and CEO) before it merged with BP.

Recently, he has been delivering thoughtful remarks on his perspectives on the industry and the downturn to several groups, including the Houston Producers Forum—and in April, he spoke at Oil and Gas Investor’s 8th annual Energy Capital Conference, where he was named Executive of the Year for 2014.

The award recognizes a 40-year career that has culminated with Noble Energy discovering two world-class natural gas discoveries offshore Israel, several big projects in the Gulf of Mexico, and plans to wildcat in the Falkland Islands, all while continuing its successful development in onshore U.S. shales.

Noble Energy’s midpoint guidance for 2015 calls for production of about 305,000 boe/d, with a revised capital program of about $2.9 billion (60% devoted to its core onshore plays—the Marcellus and Niobrara shales).

During Davidson’s tenure, Noble has been an advocate for the oil and gas industry. It helped found America’s Natural Gas Alliance (ANGA) and more recently, Coloradans for Responsible Energy Development (CRED), which successfully staved off a ballot initiative that would have sought to greatly reduce development statewide.

Along the way, Davidson has won much recognition. In 2010 he was given the Partners for Democracy Award by the America-Israel Friendship League and in 2012, was awarded IPAA’s Chief Roughneck Award. In 2014, the Harvard Business Review included him on its list of the Top 100 Best-performing CEOs in the World.

We sat down with Davidson to compile some of his remarks and get more of his thoughts on the industry. He said he is not planning to retire fully, and will remain engaged on several nonprofit boards, such as the Houston Food Bank, the Society for Performing Arts, the Sam Houston Area Council of the Boy Scouts and other civic endeavors.

Investor: Chuck, please give us some perspective on this oil downturn, which is not your first.

Davidson: We’ve really been drowned by stories about oil every day in the media these last few months. I woke up this morning and there was the price of oil on the front page of the Houston Chronicle, and it was down again, and I said, “Oh gee, not that!” So the news has been pretty bleak. But I think it is certainly helpful to look at the past—the better you can understand something, maybe the less bleak it appears and the more you understand where things might be going.

Right after what I call Black Friday [in November when OPEC refused to cut its oil production], I started hearing people say things like, “Well, this is not our first rodeo with OPEC.” Or, “We know what we need to do.” Or the more bold ones said, “This is just a repeat of 1986.”

I’m going to push back on that latter one a little bit.

Investor: What do you mean?

Davidson: My experience has been that over four decades in this industry, every one of these ups and downs is unique and has its own traits, and the more we understand what’s unique about this one, the more we’ll know how to move forward.

Many have taken the approach that this has always been a volatile business and prices will go up and down. It’s not true. For example, at Noble Energy we’ve been looking at a lot of historical data. Between World War II and 1970, oil was a very boring commodity; for about 25 years it was pretty much unchanged.

Unfortunately, the 1970s did usher in a period of volatility. I entered the industry in 1972 and I do remember dramatic changes in the ’70s, when we had oil shortages and price controls and lines at the service station. It was really tough times. Global events then related to major price increases or declines. It was getting more complicated.

I have two big observations. While we all vividly remember the price collapses…the reality is that history shows that oil prices have a tendency to move up just as quickly as they move down. The second thing is, there is about an even number of major ups as there are major downs.

We often reference the collapse in 1986—I was in Midland at the time and saw the value of my house drop in half in two or three months, so I remember that one vividly. OPEC was trying to balance things out. Their market share had been eroding in the early ’80s from 30- to 15 million barrels per day, and there was a lot of supply growth elsewhere in the world in that period—Nigeria, Venezuela, Prudhoe Bay, and the North Sea were coming on. Finally, in 1986, OPEC reacted.

Now look at 2000 to 2014—there were a lot of upward price moves going on (except for the 2008-09 recession). So there’s been a lot of volatility, but I’d say that today is not a repeat of 1986.

Investor: Why not?

Davidson: In both instances it was about defending their market share, but the environments are much different.

Today we’ve got global demand growing, whereas in the ’80s we didn’t. Demand is growing, so that’s how we are going to be able to sop it up [oversupply]. Also in the ’80s, OPEC had lost tremendous market share while today they haven’t—they’re just worried they might. That is a big difference. In the last three years, the global market went from being undersupplied in 2013 to where it became dramatically oversupplied. We don’t have to look very far for the culprit here: It is us, it is North America. We were very consistently growing production.

So OPEC had a decision to make, just like all of us have a decision to make. They didn’t blink, and as a result, prices collapsed.

Investor: Where do we go from here?

Davidson: You see it every day in the headlines and it’s painful to watch. How many businesses out there in the world can sustain a 50% drop in their revenues literally overnight and survive? I submit the oil industry is one of the few that can do it. And we can adapt very quickly. You have to stop spending and you have to cut costs. After the tourniquet is on, then you can change your business plan and figure out what your future holds. But in these last few months, it’s about stopping the bleeding.

This industry knows how to stop spending—we really have hit the wall. We all just froze. From Thanksgiving through the end of March this industry has dropped more than 800 rigs in the U.S. That’s a massive reduction in spending, and it’s a good thing, although sadly it has a massive impact on people and jobs. With that kind of response, chances are supply growth is going to be tempered sooner rather than later.

If you look at the IEA forecast, you can easily see a decline in North American production in 2015 that carries on into 2016 and that will begin to bring the market into balance. We all learned in business school that when supply and demand are not balanced, markets are unstable. They just do not work well.

With an assumption that global demand grows as the IEA is projecting, and that OPEC only produces in 2015 what it did in 2014—that’s a big assumption—the market approaches balance by the end of this year. But in the end, the future is going to be what it is. The industry has done what it needed to do to right the ship.

There’s one other thing to worry about: Here in the U.S., we’re putting a lot of oil into inventory and the reality is, we’re going to have to bleed that storage off. That might drag things out a bit.

Investor: What sort of advice do you have for E&P companies?

Davidson: On the corporate side, we’ve got to get our fiscal houses in order. Cash is king—but it’s always been king. There’s a lot of cash burn going on here. Also, companies have to reexamine their fundamental plans to make sure they understand what is going to work in this new world. Globally, we’ve got to get the supply-demand thing back into balance.

Investor: What’s Noble Energy been doing in particular?

Davidson: We’ve just been having fun like everybody else! We quit numbering our budget revisions when they got to double digits and we just put the date and the time on it. We are a diversified company and we’ll lean on that a lot over the course of this year.

We are also investment-grade and we’ll do everything we can to protect that rating. We ended last year with about $5 billion in liquidity. For whatever reason, we thought it was a good idea (and it turned out to be a great idea), to go to the debt market in October and we issued about $1.5 billion in bonds when we really didn’t need it. That’s helped us. And we also went into the equity market as a protective measure to support the balance sheet and provide flexibility.

Investor: And, you’ve cut spending.

Davidson: We cut our capital program 40% and we didn’t like to do that. But we don’t know how long this will last and we are not going to bet our company that the optimistic projections are right. We have to run our company based on virtually any scenario that happens, and if good news happens, great, we’ll take advantage of that. You don’t want to make it too complicated in times like this. We’re going to have to have a little patience here.

Investor: Do you support crude exports?

Davidson: I believe it’s important for our country to access world oil markets and if we don’t, there’s another shoe to fall, and if heaven forbid we fill storage and cannot export our oil, we will have to shut in. So I am an advocate of open, global, markets.

Investor: Do we need to get back to $80 for activity to pick up?

Davidson: That is the big unknown right now. There is no question the costs are coming down and we were already getting more efficient. The threshold prices producers will need to resume development are probably lower than they were, but we just don’t know where that is yet.

It’s hard to tell where the equilibrium price will be because the cost structure has already changed. We’ve all gone back to our suppliers, and they’ve gone back to their suppliers, and we are all wringing costs out of the system. Some producers have chosen not to complete their wells, so there is a concern that once they resume that, there could be a surge in production.

Investor: Based on your experience, what are the key things Noble Energy or any company should be doing first in a downturn like this?

Davidson: It really is about focusing on your balance sheet. When you lose 50% of your oil revenues literally overnight, there is just no way you can “increment” your way back to health. You have to stop, and decide where do you want to be and how do you get yourself there? In this environment, it’s really important to never lose sight of your cash flows—what’s going in and what’s going out?

Investor: What about hedging?

Davidson: Yes, some companies, including Noble Energy, are hedged, and if you’ve hedged that gives you a little breathing room, but no one should have a false sense of security based on their hedges. There’s no guarantee where oil prices will be a year from now when your hedges roll off.

It’s better to look at your ongoing run rate based on current prices. I think it’s better to take a clean-sheet-of-paper approach and build it back up, rather than to keep chipping your way down on an existing budget.

I remember back in 1986 when prices collapsed (I was with Arco in Midland), we canceled every AFE we had in the district—just canceled everything. Then we asked ourselves, “If we had just one dollar to spend, what is the best first thing we’d like to do with that dollar? There are so many things that may have looked really great six months ago that now, just don’t belong in the portfolio.”

Investor: What about lease commitments?

Davidson: I would say everything is on the table. OK, maybe you might lose a lease, but in this environment would you spend money to keep something that is not economic? You can probably get the lease back later on anyway.

Now in our case, we have made some commitments to a country or a government, so we think there is huge reputational risk if we don’t honor those commitments. Yes, there may be cost penalties if I lay down a rig, but in general it’s probably better to pay the penalty with such a severe environment.

I would say, start from scratch and keep yourself completely open on what you might consider, how you might fund things. In December we didn’t even attempt to say this is our final budget ... it wasn’t the right time. If something else happens, good or bad, we have to remain flexible and adjust. You don’t just wait for a little blip and then assume things are better; you look for signs of long-term stability and you focus on those fundamentals of supply and demand.

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