Oil & Gas Exploration and Production

The primary goal of this strategy is to identify companies that, with low-cost operations and high-quality reserves, can remain profitable across the full oil price cycle. During industry downturns, low costs provide a survival buffer; during upcycles, they enable exceptional profit margins. Reserve quality determines a company’s mid- to long-term production potential and continuity. We analyze each company’s breakeven oil price, which reflects all costs, including extraction, transportation, operations, and taxes. Unit operating costs are compared across companies and basins. We also evaluate reserve life, measuring how many years current reserves can sustain production at current rates, and assess reserve composition, distinguishing between proven developed reserves, which provide stability, and undeveloped or growth reserves, which offer upside but carry higher uncertainty. Geographic location and political risk are also key factors to consider.

We seek companies whose free cash flow grows non-linearly during oil price rallies. This elasticity depends not only on higher oil prices but also on disciplined capital management, with cash flow prioritized for shareholder returns or debt reduction rather than reckless expansion. We model operating and free cash flow under multiple oil price scenarios to assess sensitivity to price movements. Special attention is given to capital expenditure plans, alignment with cash flow, and dividend and share repurchase policies. We favor management teams that commit to returning a significant portion of free cash flow to shareholders and maintain a clear capital return framework, ensuring that profits during upcycles are effectively delivered to investors.

Given the strong cyclicality of the oil and gas industry, downturns are unavoidable. Our goal is to select companies with financial structures robust enough to weather industry lows without selling assets at depressed prices or diluting equity. A healthy balance sheet is essential for surviving down cycles and capturing opportunities during recoveries. We rigorously evaluate leverage, including net debt-to-equity and net debt-to-EBITDA ratios, as well as debt maturity profiles to avoid refinancing risks from concentrated short-term obligations. Interest coverage ratios and sources of debt repayment are also assessed, alongside hedging strategies—moderate oil price hedging can smooth cash flow, but over-hedging may limit upside potential. Companies with strong financial foundations are more resilient and anti-fragile during downturns.