That's good news for investors, who can look for companies willing to adjust their corporate strategy and be more efficient. It also could bring more mergers as the industry consolidates.
Energy executives already are being forced to do things differently. The refiner Tesoro (TSO) , for example, is considering reviving a shut reformer at its Golden Eagle plant in California to help meet growing global petrochemical demand for condensates such as xylene, which is seeing greater usage to fabricate polyester fibers.
Another example is Denbury Resources (DNR - Get Report) , a carbon dioxide-enhanced oil recovery leader that is getting back to its roots. The company has recently announced it will create innovation teams reporting directly to the CEO in order to improve operational results and increase shareholder value.
Then there's the M&A factor. Most energy companies have seen their market caps plunge in reaction to the selloff in oil prices. That's likely to drive more deals as companies seek to add production and bring value to depressed assets. Investors already are looking at Talisman Energy (TLM) as a takeover play, possibly by Repsol (REPYY) .
Most companies will slash capital expenditures next year -- ConocoPhillips (COP - Get Report) being the latest example -- since some projects won't be economically viable with oil prices this low. That's why companies including EOG Resources (EOG - Get Report) and Murphy Oil (MUR - Get Report) may be better positioned with lost cost/high return operations in the Eagle Ford shale region. The same goes for Hess (HES - Get Report) and Whiting Petroleum (WLL - Get Report) in the Bakken.
Cutting back production will certainly help ease the downside risk in crude oil prices and may cause more bottom fishing in the energy sector. And investors will want to pay attention to companies that use technology in new ways to dramatically lower costs. This is why companies such as BP (BP - Get Report) , Chevron (CVX - Get Report) , Statoil (STO) , ConocoPhillips (COP - Get Report) and Shell (RDS.A - Get Report) may outperform next year.
The energy sector will likely see more innovation, sales of non-core assets to boost cash flow and joint ventures to share project risk in the coming year. Investors should look for companies that embrace the new world of lower oil prices rather then continuing to play defense.
At the time of publication, Denbury Resources was a client of the author's consulting firm, Blue Phoenix.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates TESORO CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate TESORO CORP (TSO) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, compelling growth in net income, attractive valuation levels, largely solid financial position with reasonable debt levels by most measures and notable return on equity. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: TSO Ratings Report