As we enter the New Year, it’s clear that the Battle of the Downturn continues in full force, and that the oil and gas sector must anticipate surviving the better part of this upcoming year on cash-flow rations. As of this writing, the price of oil is testing a $30/bbl floor, with downward pressure applied by a strengthening dollar, and natural gas flirting with $2/Mcf, beaten down by balmy winter temperatures.

How low can they go? Well, never mind that.

It’s in this environment that E&Ps attempt to set a budget for the year, and almost all agree that capex must match cash flows. But who can peg that? With commodity prices a moving target, budget plans will have to remain flexible through the coming months.

Wells Fargo analyst David Tameron foresees 2016 capital budgets off by 35% to 40% from 2015 levels, which in turn were down 39% from 2014. He believes management teams will plug $40/bbl into their budget spread sheets.

“Structural changes are finally taking hold,” he wrote in a January report, “and while we are not through yet, capital spending cuts should finally begin to impact U.S. production levels, setting the stage for a price recovery … While we are not bold enough to pinpoint the bottom, we believe we are at or near. We believe a healthy recovery is underway.”

Analysts at Tudor, Pickering, Holt & Co. are in lockstep with this prediction, themselves modeling a $40/bbl strip price to guide budgets. “Investors would like to see capital budgets set as close to cash flow as possible,” the firm said in a January 12 note. “There is little ability to defend activity beyond meeting HBP [held by production] commitments or concerns that it will be harder to grow when the turn comes.”

In fact, Tudor, Pickering has reached the conclusion that actually drilling wells in today’s price climate is destructive to a company’s net asset value—contrary to the “drill, baby, drill” mentality that persisted over the past decade.

“Oil prices have dropped so far that keeping the drillbit running at these levels will likely lead to declines in NAV, given marginal to negative rates of return generated at today’s strip. Further, in plays like the Bakken and Eagle Ford, where core undeveloped resource may only have five to 10 years of inventory in a normalized commodity environment, operators are now chewing through resource which is likely better left in the ground today and tapped heading into a recovery scenario.”

Let’s carry this thought a step further. With the debt market for E&P companies trading at multi-year lows and still deteriorating, Raymond James analyst J. Marshall Adkins begs the question: Is it better to employ incremental cash flow drilling new wells (as even positive return wells can still be cash-flow negative for two or more years), or is it better to buy back distressed debt at a severe discount?

The consequence of two decades of outspending cash flow for the all-important goal of production growth has caught up to E&P big spenders. The result, said Adkins, is a collapse of the debt markets for E&P companies, with a significant number of noninvestment-grade bonds trading at massive discounts to par.

“For the first time in decades (excepting a brief window in 2008-2009), distressed E&P companies may be able to obtain a higher rate of return through unsecured debt repurchases rather than drilling new wells.”

In good times, operators could expect 30% to 100% rates of return on drilling, compared with debt costs of 3%-4% for senior secured notes, and 6%-8% yield to maturity for unsecured bonds. But these are not normal times, he said. Unsecured bond prices have declined in value by an average of 50% since the summer of 2014, and drilling economics are “relatively lousy,” with only Permian drilling delivering 30%-plus rates of return currently, and the vast majority realizing sub-20% or even negative returns.

In contrast, levered companies can buy back their debt at 30% or greater yield to maturities, a safer bet than drilling or A&D at this time.

“The yield to maturity on the publicly traded debt for many operators is now greater than the drilling returns,” said Adkins. Accordingly, “many highly levered E&Ps should now be inclined to buy back their own bonds with cash flow that would otherwise be allocated to drilling new wells.”

Raymond James estimates some $26 billion of outstanding unsecured debt is attractive for repurchase.

And in a “survival of the fittest” world, until the markets balance, that may be the battle tactic of choice.