Competition Grows As Industry Blooms
The U.S. oil and gas industry continues to thrive as the country’s economy improves steadily and shale remains profitable. In BDO’s Oil and Gas RiskFactor Report this year—an analysis of the risk factors listed in the most recent 10-K filings of the 100 largest public U.S. E&P companies—we discovered that while the top 20 industry risks remain largely consistent with previous years’ studies, a few new concerns are beginning to surface. Regulatory changes and commodity price volatility were this year’s most-cited risks, a trend that has continued since our inaugural RiskFactor Report in 2011. This is no surprise for an industry that has long faced perennial uncertainties about external threats to their operations. However, amid the sector’s continuing profitability, competition for qualified leadership and the recovery of undeveloped reserves now pose greater challenges for companies as the number of operational entities grows and competition intensifies. This year, 80 percent of companies cite the ability to attract and retain key personnel as a top risk, up nearly 10 percent from 2013, and 81 percent of companies express increasing apprehension over their inability to recover their undeveloped reserves economically or before their leases expire. This marks a one-third increase since 2013. Meanwhile, an uncertain regulatory environment remains top-of-mind for companies, and businesses continue to keep a watchful eye on state and federal regulations. A May 2014 Government Accountability Office report noted an increasing number of states implementing stricter standards for well construction, water testing and waste disposal. And while states may be leading the charge on environmental regulations, the federal government continues to present potential tax challenges for companies. This year, the number of companies citing the loss of federal income tax incentives, such as intangible drilling costs and percentage depletion, as a risk jumped 8 percent, with two-thirds of companies noting it in their 10-Ks. Our study also found that hydraulic fracturing remains a persistent challenge for the industry. Consistent with last year’s numbers, 85 percent of companies cite fracking regulation as a risk, nearly double the number who cited it in our first RiskFactor Report. However, this proportion did not deviate from our 2013 study, suggesting that companies are more prepared for the regulation and are looking to cooperate with federal and state governments as fracking discussions become more commonplace. Finally, amid their concerns over commodity price fluctuations, many companies have entered into hedging agreements to protect their revenues and guard against price drops. These derivative arrangements carry their own risks, however: A majority (85 percent) listed use of hedging instruments as a risk this year, and 65 percent remain worried that counterparties to these transactions may default. In addition, 69 percent of companies indicate that hedging regulation, such as Dodd-Frank, may pose a threat to their operations. Overall, our report revealed oil and gas companies remain confident in the industry’s robust growth and accept the associated risks underlying opportunities. Regulatory and commodity price risks remain at the forefront, but companies have come to understand these as a standard part of the business. Moreover, as the sector grows, it will continue to foster competition, and companies will seek to reevaluate their business models to address these concerns. And despite these sore spots, the industry’s upward trajectory will remain a source of optimism for the national and international economy. This guest post has been written by Charles Dewhurst, leader of the Natural Resources practice at BDO USA. He can be reached at firstname.lastname@example.org.