Energy CFOs expect a run on distressed assets in 2016

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% of US oil and gas 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% of energy CFOs expect merger and acquisition (M&A) activity to rise in the coming year, up from 56% 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 that have been  struggling in this tumultuous pricing environment. Unsurprisingly, just under half (49%) of CFOs believe that undervalued oil and 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% in 2015 to 45% 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% last year and 40% 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 CFOs at US oil and gas exploration and production companies. The nationwide survey was conducted from September through November 2015.

Additional findings from the 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% of CFOs say they will be increasing capital investment in offshore exploration, down from 23% in 2015. Meanwhile, the number of CFOs planning to increase investment in nonconventional plays dropped from 47% 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% of CFOs say they are likely to reduce their labor force in order to increase profitability, up from 1% 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 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 a front-and-center concern, focus on environmental regulation wanes. Given the state of the industry, it is 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% a year ago. Investments in environmentally friendly exploration and production technologies have also grown less feasible for many companies: just 22% of CFOs plan to increase their investment in this area, down from 35% in 2015.


Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now


Making DDoS Mitigation Part of Your Incident Response Plan: Critical Steps and Best Practices

Like a new virulent strain of flu, the impact of a distributed denial of service (DDoS) attack is...

The Multi-Tax Challenge of Managing Excise Tax and Sales Tax

To be able to accurately calculate multiple tax types, companies must be prepared to continually ...

Operational Analytics in the Power Industry

Cloud computing, smart grids, and other technologies are changing transmission and distribution. ...

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...