--Supply Cuts Lie Ahead as Companies Seek Stability--
USA LLP released today results from its 2016 Energy Outlook
Survey, which found that 60 percent of energy
chief financial officers (CFOs) expect changes in oil & gas prices to be
the single most important factor dictating whether the 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
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 percent) say they have experienced
project terminations or delays in the past year. This is up from 27
percent in last year’s study and is the highest proportion reporting
cancellations since the last industry downturn. Of those respondents
experiencing project disruptions, an overwhelming majority (96 percent)
cite poor project economics as the leading cause.
“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
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 percent 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 percent and 38 percent
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
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
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 percent believe
the domestic supply of oil will decrease—a nearly threefold increase
over the number expecting declines in 2015—and 17 percent 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 percent 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 percent of CFOs
expect the domestic supply of natural gas to increase in the coming
year—a decrease of 38 percent from last year’s survey (64 percent).
Nevertheless, CFOs are somewhat optimistic that demand will remain
robust: Forty-six percent believe global demand for natural gas will
increase in the next year, and more than half (54 percent) 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 percent cite more restrictive government regulations, down
from 38 percent 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.”
BDO is the brand name for BDO USA, LLP, a U.S. professional services
firm providing assurance, tax, financial advisory and consulting
services to a wide range of publicly traded and privately held
companies. For more than 100 years, BDO has provided quality service
through the active involvement of experienced and committed
professionals. The firm serves clients through 63 offices and more than
450 independent alliance firm locations nationwide. As an independent
Member Firm of BDO International Limited, BDO serves multi-national
clients through a global network of 1,328 offices in 152 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S.
member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member
firms. BDO is the brand name for the BDO network and for each of the BDO
Member Firms. For more information please visit: www.bdo.com.
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