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Balance Sheet Strength and Strategic Management in the Oil and Gas Industry

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Title:Balance Sheet Strength and Strategic Management in the Oil and Gas Industry
Authors:Anderson, Mark
Banker, Rajiv
Ma, Yan
Park, Han-Up
Keywords:balance sheet strength
strategic management
cyclical industries
oil and gas industry
Date Issued:02 Sep 2018
Abstract:We investigate how accounting can support strategic decision-making in the dynamic context of cyclical industries where risk is the nature of business. We conduct our analysis in the context of the Canadian Oil and Gas (O&G) Industry. Based on our discussions with industry leaders, analysis of company disclosures, and reviews of industry reports, business and academic articles, we identify two strategies that are prevalent in the O&G industry – an aggressive strategy that invests heavily in growth periods and a conservative strategy that invests less in growth periods to build and sequester resources for decline periods. We use a long-term measure of balance sheet strength based on cash flows to debt to discriminate across these two strategies. We find that companies that are more conservative (lower debt to cash flows over time) achieve higher operating efficiency in general and that their efficiency advantage is greater in post-crisis periods following sharp price declines. We also document that conservative firms invest more in post-crisis periods and that their acquisitions yield significantly more reserve quantities per dollar of investment than other companies, especially in the post-crisis periods.
Appears in Collections: 07 Management Accounting

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