Energy Sector’s Enthusiasm for Growth Diminishes in a Lingering, Volatile Market
The U.S. energy industry continues to struggle to find its footing as commodity prices remain stubbornly low. In BDO’s 2015 Oil and Gas RiskFactor Report—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 identified declining prices as the main culprits dampening companies’ enthusiasm for investment and expansion, in turn amplifying the potential impact of impediments to future growth. For the first time since the study’s inception, risks related to replacing or expanding reserves were the most frequently cited threat, with all companies indicating low prices are inhibiting their ability to make key investments in maintaining supply. This finding comes as little surprise, with IHS reporting the industry hit a 20-year low in the number of newly-discovered oil and gas reserves in 2014.
At the same time, we found the number of companies concerned about their ability to meet production minimums tripled, increasing to 36 percent from 12 percent in 2014. Amid this uncertain supply environment, 82 percent of companies also expect shortages in rigs, equipment and personnel to further constrain their ability to maintain the robust production levels they had previously enjoyed. Declining oil prices are also fueling increased worry about accounting-related risks among producers, such as maintaining internal controls and complying with accounting regulations. This year, the number of companies citing this risk jumped by 47 percent, with 84 percent noting it in their 10-Ks. Low prices are forcing companies to record impairments on their balance sheets amid heightened scrutiny from the SEC and PCAOB, significantly threatening organizations’ financial results and operational practices. Meanwhile, a less-than-stable regulatory climate remains among the chief risk factors for companies. However, a notable trend has emerged over the past few years: Hydraulic fracturing (fracking) regulation has now become virtually universal. This year, 96 percent of companies identify fracking regulation as a risk, nearly double the number citing it in the inaugural 2011 Oil & Gas RiskFactor Report. Fracking has become a bedrock of the U.S. energy sector, with the Energy Information Administration reporting that shale formations produced approximately 4.19 million barrels per day of crude oil and 4.51 trillion cubic feet of natural gas in 2014. It is no surprise, then, that companies have become increasingly sensitive to attempts to regulate it. Our study also found the threat of increased oversight is causing a ripple effect among other fracking-related risks companies face. Fifty-two percent of companies express worry about their ability to secure sufficient amounts of water required for fracking, a nearly 25 percent increase from last year. Furthermore, the effect and environmental impact of wastewater injection and disposal techniques worry companies facing mounting pressure from policymakers and the public to either ban the practices entirely or to implement more eco-friendly procedures: 95 percent of companies cite environmental and health regulation as a risk in this year’s study. Meanwhile, companies must also keep abreast of new and emerging risks to their business. Securing sensitive digital information has steadily grown as an important issue as hackers become increasingly sophisticated and adept within today’s evolving technological landscape. In fact, the Department of Homeland Security’s Industrial Control Systems Cyber Emergency Response Team reports that the energy sector leads all others—including manufacturing and healthcare—in the number of reported cyber theft incidents in fiscal year 2014. Our study found that nearly three-quarters of the companies analyzed cite cybersecurity attacks as a risk, up from a mere 12 percent in 2012. Overall, while our report underscores the anxiety the industry has experienced over the past year, the market has begun to recover, with prices creeping up past $60 per barrel in recent months. As the sector continues to right-size, companies who take a longer-term approach in addressing this challenging, evolving price environment may be well-positioned to weather the storm. 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.