US energy CFOs feeling optimistic about industry's financial health

BDO

With the US shale boom continuing and the economy slowly but steadily improving, the energy industry is experiencing a rebound in confidence and financial stability. According to BDO USA LLP’s annual survey of 100 US oil and gas chief financial officers, 71% of CFOs feel better about their companies’ ability to access capital and credit in 2014 as compared to 2013, a 20% increase over the number expressing similar sentiments in last year’s study. Driving this optimism is improvement in the capital markets, as well as healthy international demand for US resources. In fact, 64% of CFOs anticipate that global demand for natural gas will grow next year, and 65% expect a similar increase for oil.

“Oil and gas executives can feel relatively secure in their finances this coming year as the US energy industry continues to gain momentum,” says Charles Dewhurst, partner and leader of the Natural Resources practice at BDO. “Not only is our economy improving, but with demand exploding worldwide, new doors are opening for increased revenue. We are seeing significant foreign investments flowing into US assets, as well as a growing need for US oil and gas globally—and the price differential is quite favorable for us.”

However, CFOs are planning to proceed cautiously, prioritizing efficiencies over expansion. CFOs expect merger and acquisition (M&A) activity to stabilize in 2014, with more than half anticipating no change in deal flow and only 43% expecting an increase. This contrasts with last year’s projections, when more than 50% of CFOs expected to see a rise in M&A activity. CFOs have likely been chastened by slowed deal flow in 2013. 2012 saw a torrid deal pace, with energy industry consultancy PLS Inc. reporting $83 billion in US deals; as of Q3 2013, however, the US has seen only $34 billion worth of activity. A plurality (38%) of CFOs expect that the primary driver of M&A activity in 2014 will be increasing revenue and profitability, as opposed to undervalued oil and gas assets (27%) or a desire to increase market share (15%).

These findings are from the BDO 2014 Energy Outlook Survey, which examines the opinions of 100 chief financial officers at US oil and gas exploration and production companies. The nationwide survey was conducted from September through November 2013.

Additional findings from the BDO 2014 Energy Outlook Survey include:

Companies to focus inward in 2014. Reinforcing executives’ caution, companies are looking to streamline operations and reduce costs in 2014 in an effort to entrench the gains of recent years. When asked how they plan to bolster profitability, one-third of CFOs cite improving internal business processes as a top tactic. Only a quarter anticipate investment in new technologies, while a mere 9% plan to pursue vertical integration through acquisitions. Nearly one-in-four CFOs expect to scale down their business: 12% plan to reduce exploration, while 11% cite staff cuts. In addition, a plurality (38%) say they will pursue cost reduction programs in an effort to increase value for stakeholders, a 58% jump from last year’s study.

Private equity increasing its share of investment. While 45% of CFOs cite traditional debt financing as their preferred source of outside capital, private equity is keeping pace. Forty percent of CFOs plan to tap private equity funds in the coming year to finance their activities. Private equity is becoming an increasingly important way not only for companies to finance capital improvements and infrastructure development, but also for investors to take advantage of the strong ROI offered by the United States’ ongoing shale renaissance.

Labor costs on the rise. Despite the fact that most CFOs (63%) don’t anticipate increasing the number of personnel they employ in the next year, 49% of CFOs expect their labor costs to grow by as much as 15% in 2014, and 12% expect to see increases exceeding 15%. 

“The labor market hasn’t yet caught up to the growth of the US oil and gas industry,” says Lance Froelich, senior director of compensation consulting in the Global Employer Services group and a member of BDO’s Natural Resources practice. “A very significant percentage of open positions are being filled by buying talent, and this phenomenon is driving salaries, sign-on incentives and special perquisites higher.”

Environmental responsibility guiding future investments. CFOs are increasingly seeking environmentally-responsible ways to exploit US oil and gas resources. With hydraulic fracturing sustaining ongoing scrutiny from the government and public alike, 61% of CFOs indicate that they plan to increase their capital investment in environmentally-friendly E&P processes. This represents a 15% increase over last year’s proportion. While 60% of CFOs similarly anticipate increasing their investment in non-conventional resources, such as shale, this suggests that US energy companies have accepted that environmental stewardship must be a crucial component of their business plans.

The BDO 2014 Energy Outlook Survey is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to CFOs at a sample of oil & gas exploration and processing firms (with revenues ranging between $76,000 and $1.2 billion and an average revenue of $154 million) from September through November 2013.

BDO is the brand name for BDO USA, LLP, a US professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies.

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