Companies Seek to Slim Down as Balance Sheets are Tested
As 2016 begins, the energy industry remains uncertain of when the sector
will turn around—and companies are taking steps to streamline operations
until prices begin to recover. With 85 percent of U.S. oil and gas chief
financial officers (CFOs) predicting low oil and gas prices to be their
greatest financial challenge in 2016, many energy companies are looking
to tighten their belts by selling off assets.
According to BDO
USA LLP's annual Energy Outlook Survey, 75 percent of
energy CFOs expect M&A activity to rise in the coming year, up from 56
percent last year. Though activity was slower than expected in 2015,
deal pace has already started to pick up, with industry giants like
Schlumberger and Shell acquiring smaller rivals who have been struggling
in this tumultuous pricing environment. Unsurprisingly, just under half
(49 percent) of CFOs believe undervalued oil & gas assets will be the
primary driver of transactions as larger companies and investors home in
on struggling companies seeking to shed distressed properties and
business units.
The energy sector’s increased pessimism about their ability to access
capital and credit may also catalyze deal activity in the months to
come. The percentage of CFOs who feel worse about their company's access
to capital has more than doubled, from just 20 percent in 2015 to 45
percent this year. During October 2015's debt redetermination period,
many heavily-indebted exploration and production companies saw
reductions in their borrowing bases, which has already produced
operational impacts: Forty-five percent of CFOs experiencing project
delays or terminations over the past year cite lack of capital as a
leading cause.
“Throughout 2015, we saw many M&A players hesitant to engage in deal
activity, likely because sellers hoped the bust cycle would balance out
throughout the year and drive valuations up,” says Charles
Dewhurst, leader of the Natural
Resources practice at BDO. “However, as we enter the new year, they
are letting go of the idea of rapid recovery and may look to sell before
valuations bottom out further.”
With debt financing becoming increasingly challenging for energy
companies, many are increasing their reliance on private equity to keep
afloat. Fifty-five percent of CFOs surveyed say they are likely to
utilize private equity as a source of outside capital in the coming
year, up from 50 percent last year and 40 percent in 2014. For their
part, private equity firms view the current marketplace as an excellent
opportunity to deploy capital and pick up inexpensive assets—and reap
the rewards when oil prices rebound.
These findings are from the BDO 2016 Energy Outlook Survey,
which examines the opinions of 100 chief financial officers at U.S. oil
and 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:
Sector planning to be more conservative in funding new investments.
CFOs are rethinking expenditures as commodities prices continue to hover
near record lows. Despite the Obama administration’s decision to permit
offshore drilling in the Arctic and Atlantic last year, only 1 percent
of CFOs say they will be increasing capital investment in offshore
exploration, down from 23 percent in 2015. Meanwhile, the number of CFOs
planning to increase investment in non-conventional plays dropped from
47 percent last year to approximately one in three CFOs this year.
Industry reining in labor costs amid looming staff cuts.
In addition to cutting back on investments, oil and gas companies are
making tough decisions as contracting prices force them to scrutinize
their labor costs. Seventy-one percent of CFOs hope to keep staffing
levels consistent with last year, while 9 percent of CFOs say they are
likely to reduce their labor force in order to increase profitability,
up from 1 percent last year. Those employees who do survive the cuts are
likely to personally feel the impact of tightening budgets: Fifty-seven
percent of CFOs expect employee bonuses to be smaller for fiscal year
2015.
“Executives must balance the need to bring costs down with the very real
risk that a large reduction in labor force may catch them on the back
foot when prices begin to climb again,” says Jim
Willis, senior director of compensation consulting in the Global
Employer Services group and a member of BDO’s
Natural
Resources practice. “The industry is threading this needle for now
by effectively implementing a hiring freeze, but if prices remain low
for much longer, more companies may need to seriously evaluate reducing
their headcount.”
While commodity price volatility remains front-and-center, focus on
environmental regulation wanes. Given the state of the industry,
it's unsurprising that concerns about environmental compliance risks
have lessened considerably, with about one in five CFOs citing it as the
primary area of focus for their risk reduction activities, compared to
61 percent a year ago. Investments in environmentally friendly
exploration and production technologies have also grown less feasible
for many companies: Just 22 percent of CFOs plan to increase their
investment in this area, down from 35 percent in 2015.
About BDO
USA
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 1,408 offices in 154 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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