Regulatory hurdles and geopolitical risk persist
The U.S. energy industry continues to struggle to find its footing as commodity prices remain stubbornly low. This year’s BDO Oil and Gas RiskFactor Report, which analyzes the risk factors listed in the most recent 10-K filings of the 100 largest public U.S. E&P companies, finds that low prices are dampening companies’ enthusiasm for investing and expanding—and amplifying the potential impact of impediments to future growth.
“Ironically enough, the resulting lack of domestic supply may help push prices back up, but for now, it appears that U.S. companies are poised to feel the most pain as the market corrects itself.”
For the first time since the study’s inception, risks related to replacing or expanding reserves was the most frequently cited threat, with all companies indicating low prices are inhibiting their ability to make key investments in maintaining supply. According to IHS, the pain is widespread: The number of newly-discovered oil and gas reserves reached a 20-year low in 2014. Amid this uncertain supply environment, 82 percent of companies also expect to experience shortages in rigs, equipment and personnel, further constraining their ability to keep up production. This represents a 5 percent jump in the number of companies citing similar concerns in last year’s study.
“Many in the oil & gas industry expected the commodity pricing environment to improve fairly quickly, but a variety of market forces—including growing supply in the Middle East and difficulties exporting U.S. resources abroad—have conspired to hit U.S. producers’ bottom lines hard,” says Charles Dewhurst, leader of the Natural Resources practice at BDO. “Ironically enough, the resulting lack of domestic supply may help push prices back up, but for now, it appears that U.S. companies are poised to feel the most pain as the market corrects itself.”
Moreover, the past year’s decline in oil prices is also driving increased worry about accounting-related risks, such as maintaining internal controls and complying with accounting regulations. The number of companies citing this risk grew by 47 percent, with 84 percent of companies noting it in their 10-Ks. While low prices continue to force companies to record impairments on their balance sheets, intensified scrutiny from the SEC and PCAOB is simultaneously drawing renewed attention to more stringent financial reporting—meaning E&P companies must devote ever-growing attention and resources to maintaining their books.
These findings are from the fifth annual BDO Oil and Gas RiskFactor Report, which examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest (by revenue) publicly-traded U.S. E&P companies. The risk factors were analyzed and ranked in order of frequency cited.
The following is a list of the top 20 risk factors cited by the 100 largest U.S. E&P companies:
|Risk Factor Cited in 10-K Filing||2015||2014||2013||2012||2011|
|1.||Inability to expand reserves or find replacement reserves||100%||98%||96%||98%||98%|
Regulatory and legislative changes and increased cost of compliance
|3.||Volatile oil and gas prices||99%||100%||100%||99%||100%|
|4.||Operational hazards including blowouts, spills and personal injury||96%||98%||95%||98%||97%|
|4t.||Natural disasters and extreme weather conditions||96%||96%||96%||95%||96%|
|4t.||Hydraulic fracturing regulation||96%||85%||85%||74%||52%|
|7.||Environmental and/or health regulations||95%||98%||96%||94%||94%|
|8.||Inadequate liquidity or access to capital; indebtedness||93%||95%||91%||94%||95%|
|9.||Inaccurate reserve estimates||91%||89%||93%||95%||96%|
|10.||Changes in demand for oil or natural gas||89%||92%||91%||87%||76%|
General national or global economic conditions
|12.||General industry competition||87%||84%||90%||89%||87%|
|12t.||Inadequate or unavailable insurance coverage||87%||84%||86%||88%||87%|
Accounting-related concerns, including maintaining internal controls
|15.||Price of and competition from alternative fuels||83%||79%||76%||78%||72%|
Disruption due to political instability, civil unrest or terrorist
|17.||Use of hedging or derivative instruments||82%||85%||77%||48%||N/A|
|17t.||Impact of climate change and greenhouse gas regulation||82%||80%||89%||81%||69%|
|17t.||Shortage of rigs, equipment or personnel||82%||78%||88%||81%||82%|
|20.||Insufficient pipeline, storage or trucking capacity||80%||84%||80%||63%||29%|
*t indicates a tie in the risk factor ranking
Further findings from the 2015 BDO Oil and Gas RiskFactor Report include:
Hydraulic fracturing regulation becomes a near-universal concern. Consistent with previous editions of the study, all companies analyzed cite regulation (federal, state and international) as a risk in their 10-Ks. However, a notable trend emerging over the past several years is that concern about hydraulic fracturing (fracking) regulation has now become virtually universal. This year, 96 percent of companies identify fracking regulation as a risk, nearly double the number citing it in the inaugural Oil & Gas RiskFactor Report in 2011. With the Energy Information Administration reporting that shale formations produced approximately 4.19 million barrels per day of crude oil and 4.51 trillion cubic feet of natural gas in 2014, it is no surprise that fracking has become the bedrock of the industry—and that companies have, as a result, become increasingly sensitive to attempts to regulate it.
Middle Eastern production remains a wild card. Political conditions abroad, particularly in the Middle East, are a perennial worry for U.S. E&P companies. An overwhelming majority (83 percent) of companies cite risks associated with threats from geopolitical unrest this year, a 12 percent increase from 2014. Of particular concern is how current events are exacerbating price declines, with OPEC refusing to curb production in the face of over-supply and the potential easing of sanctions in Iran promising the reintroduction of their oil to the market. At the same time, persistent conflict in Syria and Yemen threaten to further destabilize the region, leaving the oil & gas industry uncertain as to what, if any, effects may reverberate in the sector.by