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Balance sheet strength in the oil and gas industry: Saving for a rainy day or making hay while the sun shines

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dc.contributor.authorAnderson, Mark
dc.contributor.authorMa, Yan
dc.contributor.authorPark, Han-Up
dc.date.accessioned2025-03-13T04:12:46Z
dc.date.available2025-03-13T04:12:46Z
dc.date.issued2025-06
dc.descriptionTo access the published version: https://doi.org/10.1016/j.adiac.2025.100806
dc.description.abstractWe examine how a strategic emphasis on balance sheet strength relates to investment decisions and performance over time for firms operating in a cyclical environment. From a series of discussions with industry insiders and readings of disclosures for prominent oil and gas (O&G) companies in Canada, we identify two groups of upstream O&G firms based on how they match their resources and capabilities with the uncertainties posed by industry economic cycles. One group of firms borrows and invests aggressively when oil prices are strong and funds are available – “making hay while the sun shines”, while the other group grows conservatively to build and maintain balance sheet strength – “saving for a rainy day”. We use average cash flows to debt for each firm over time to measure emphasis on balance sheet strength and separate firms into rainy day and making hay companies. We leverage two steep price declines to observe the behavior of firms over industry cycles: one triggered by the widespread 2008 financial crisis and the other by a distinct and prolonged O&G industry downturn in 2014. While investment declined generally in both cases, we find that the decline in investment was significantly less for rainy day companies than making hay firms after the 2014 downturn. Across time, we find that rainy day companies make shrewder acquisitions and operate more efficiently than making hay companies. Nonetheless, the capital market rewards making hay companies with higher market valuation, but this is reduced in downturns.
dc.description.versionPeer Reviewed
dc.identifier.doihttps://doi.org/10.1016/j.adiac.2025.100806
dc.identifier.urihttps://hdl.handle.net/10388/16686
dc.language.isoen
dc.publisherAdvances in Accounting
dc.subjectbalance sheet strength
dc.subjectoil and gas
dc.subjectcyclical industries
dc.titleBalance sheet strength in the oil and gas industry: Saving for a rainy day or making hay while the sun shines
dc.typeArticle

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