By December 7, 2015 Read More →

Energy industry expects a stormy 2016 – BDO survey

Energy CFOs pessimistic oil demand will grow substantially in 2016

energy industry

Utah oil refinery

CHICAGO, Ill. – BDO USA LLP released today results from its 2016 Energy Outlook Survey, which found that 60 per cent of energy chief financial officers (CFOs) expect changes in oil and gas prices to be the single most important factor dictating whether the energy industry recovers in the coming year—more than double the number expressing similar sentiments last year.

Though 2015 got off to a tumultuous start for the sector, CFOs seemed cautiously optimistic in last year’s study that the oil price slump would be short-lived.

However, the anticipated recovery has yet to materialize, and CFOs now expect the pain to continue well into 2016. Low oil prices have forced a number of upstream energy companies to reassess their current portfolios and make strategic cuts in an effort to save.

With oil giants like Shell and Statoil announcing plans to abandon major drilling projects, it comes as little surprise that more than half of the CFOs surveyed (53 per cent) say they have experienced project terminations or delays in the past year.

This is up from 27 per cent in last year’s study and is the highest proportion reporting cancellations since the last energy industry downturn. Of those respondents experiencing project disruptions, an overwhelming majority (96 per cent) cite poor project economics as the leading cause.

energy industry

Charles Dewhurst, leader of the Natural Resources practice at BDO

“2015 was a difficult year for the U.S. energy sector as we exited the boom period and entered a bust phase,” says Charles Dewhurst, leader of the Natural Resources practice at BDO. “Though the industry has historically been able to bounce back fairly quickly, the duration of the current price decline is forcing companies to step back and identify ways to survive with fewer resources at their disposal and no clear end in sight.”

Aggravating the tenuous industry environment is continued uncertainty about the economy and whether low prices will help move the oil demand curve in the coming year.

Fifty-six per cent of CFOs say they feel worse about the U.S. economy and its impact on demand for oil & gas products, in contrast to last year, when nearly two-thirds felt better about economic conditions.

CFOs are similarly pessimistic that demand will grow substantially in 2016, with only 28 per cent and 38 per cent expecting global and domestic oil demand to increase, respectively.

This aligns with recent projections from the International Energy Agency, which estimates global demand reaching just 900,000 barrels per day through 2020.

These findings are from the BDO 2016 Energy Outlook Survey, which examines the opinions of 100 chief financial officers at U.S. oil & gas exploration and production companies. The nationwide survey was conducted from September through November 2015.

Additional findings from the BDO 2016 Energy Outlook Survey include:

Managing supply will be critical to industry rightsizing: With global oversupply continuing to hold prices down, the CFOs surveyed expect to see supply cuts in the year ahead.

Forty-three per cent believe the domestic supply of oil will decrease—a nearly threefold increase over the number expecting declines in 2015—and 17 per cent plan to decrease their own exploration activities in an effort to improve profitability.

And as OPEC continues its game of oil price brinksmanship by flooding the market with supply, 41 per cent of CFOs say the organization’s actions will be the foremost influencer of commodity price volatility in the next year.

Pricing and supply pressures extend to natural gas: While the crash of the oil market remains top of mind for the industry, CFOs are also carefully watching natural gas inventory and prices.

Oversupply and lower prices are squeezing natural gas producers, with December delivery prices on the New York Mercantile Exchange hovering around $2 per million British thermal units.

As a result, only 40 per cent of CFOs expect the domestic supply of natural gas to increase in the coming year—a decrease of 38 per cent from last year’s survey (64 per cent).

energy industry

A Statoil operation in the Eagle Ford shale play in south Texas.

Nevertheless, CFOs are somewhat optimistic that demand will remain robust: Forty-six per cent believe global demand for natural gas will increase in the next year, and more than half (54 per cent) say domestic demand will grow, as well.

The looming general election highlights lingering regulatory concerns: When asked about their leading political concerns in 2016, nearly one-third of CFOs said that the upcoming general election worries them most, approximately double the number expressing this concern last year. Meanwhile, 29 per cent cite more restrictive government regulations, down from 38 per cent last year.

“Though concerns surrounding the regulatory environment nominally declined this year, the uptick in anxiety around the general election highlights continued uncertainty throughout the industry,” says Clark Sackschewsky, partner with BDO’s Natural Resources practice.

“The Obama administration has put numerous stakes in the ground on energy policy, from incentivizing alternative energy production to rejecting the Keystone XL pipeline, but it remains unknown which policies and regulations the next administration will affirm, reject or introduce.”

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