The U.S. energy industry has reason to feel optimistic heading into this year. According to BDO USA LLP’s annual survey of 100 U.S. oil and gas chief financial officers, 63 percent of CFOs feel more confident about the U.S. economy and its impact on demand for energy in 2014, a 54 percent increase from last year’s study. Underlying this positivity is the continuing profitability of shale exploration and production. A plurality (32 percent) of CFOs see increased oil and gas prices as the most important factor driving overall growth for the energy industry in 2014 as the United States continues to sell its inexpensively-produced resources at high international prices.
Supply and demand dynamics also continue to favor the U.S. industry. CFOs predict accelerated production of U.S. resources will continue in the New Year, with 73 percent and 76 percent of CFOs expecting the domestic supply of natural gas and oil, respectively, to increase in 2014. Accompanying this growth in supply is an attendant growth in demand. Sixty-two percent of CFOs expect domestic demand for natural gas to increase in 2014, and two-thirds (66 percent) project that domestic demand for oil will grow, as well. Meanwhile, demand overseas continues to swell, with 65 percent and 64 percent of CFOs anticipating growth in global demand for oil and natural gas, respectively.
While energy CFOs are confident that opportunities for growth will continue in 2014, they remain conscious of challenges facing the industry. A majority (53 percent) of CFOs believe legislative changes will be the top factor inhibiting overall industry growth in 2014, a modest (6 percent) increase from last year’s study. Additionally, CFOs worry about the impact of international events on oil prices: a plurality (46 percent) of CFOs cite ongoing turmoil in the Middle East as having the greatest impact on oil price volatility in the coming year as conflicts continue in the region and Iran plans to ramp up its oil production once sanctions ease. CFOs also express concern that economic growth in Asian countries will cause price fluctuations, with one-quarter of CFOs citing it as a top factor—more than a three-fold increase over last year’s study.
“Non-conventional resources remain lucrative and continue to expand the United States’ share of the international energy market,” says Charles Dewhurst, partner and leader of the Natural Resources practice at BDO. “But energy executives also know that this highly volatile industry is vulnerable to global events, and are therefore thinking carefully about their contingency plans should the price environment take a turn for the worse.”
These findings are from the BDO 2014 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 2013.
Additional findings from the BDO 2014 Energy Outlook Survey include:
Companies keep a wary eye on Washington. Industry executives continue to express concern that an uncertain legislative and regulatory agenda in Washington might hamper their operations. A plurality (36 percent) of CFOs cite regulatory changes as a top political concern for 2014, followed closely by energy industry-targeted tax proposals (26 percent). CFOs are particularly concerned about the potential loss of the tax deduction for intangible drilling costs: more than half (53 percent) cite it as their leading tax concern in the new year, down six percentage points from last year.
“The regulatory uncertainty the energy industry experienced in the run-up to the 2012 election has only slightly abated,” says Clark Sackschewsky, partner with BDO’s Natural Resources practice. “The IDC deduction is one of the largest tax breaks available to these companies, and as budget debates continue on the Hill, energy executives are concerned that it might end up on the chopping block.”
Executives accept environmental responsibility in their corporate plans. More than half (54 percent) of CFOs say they will focus their risk management activities on environmental regulation in 2014, suggesting that they recognize and accept the need to address the environmental effects of ramped-up energy production. In fact, many major producers, such as ExxonMobil and BP, are now incorporating the cost of a potential carbon emissions tax in their long-term financial plans.
Fracking is the top environmental concern. As CFOs anticipate and look to comply with environmental regulations, nearly one-in-three (30 percent) cite the impact of hydraulic fracturing as their primary environmental concern for 2014. With new shale plays gearing up for drilling, including the Tuscaloosa Marine Shale, energy companies are seeking ways to maximize production while securing buy-in from the government—state, local and Federal—as well as local communities. Carbon emissions are a lesser concern for CFOs at this time, with only 17 percent citing it as a top environmental challenge. Though concerns about climate change are unlikely to dissipate any time soon, it is clear that energy CFOs prioritize the more immediate issue of fracking.
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 and 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.