Oil and gas facing static, selective pool of prospects, leadership, labor
May 23, 2014 | By
Barbara Vergetis Lundin
The outlook for the U.S. oil and gas industry is positive in the midst of a steadily improving economy, stable prices and the ongoing profitability of shale formations across the country, according to BDO's Oil and Gas "RiskFactor" Report. The report analyzes the risk factors listed in the most recent 10-K filings of the 100 largest public E&P companies. BDO found that the top 20 industry risks continue to hold steady, with few new concerns. The two leading risks over the past four years -- regulatory changes and commodity price volatility -- suggest that companies remain primarily concerned about interruptions to the industry's ongoing growth. However, two risks are emerging as growing threats: demand for qualified leadership and the ability to recover undeveloped reserves. In 2014, 80 percent of companies cite the ability to attract and retain key personnel as a top risk -- up nearly 10 percent from 2013. As the sector continues to grow, the number of operational entities has proliferated, and competition to attract a selective group of highly-qualified executives has intensified. Meanwhile, 81 percent express increasing apprehension at the possibility of being unable to recover their undeveloped reserves economically or before their leases expire -- up one-third from 2013. "The non-conventional oil and gas industry is a highly competitive space, with new wells coming online and more companies entering the game all the time," said Charles Dewhurst, leader of BDO's Natural Resources practice. "As the industry continues its upward trajectory, we may expect to see a growing number of companies vying for a relatively static and selective pool of prospects, leadership and labor." A majority of responding companies (85 percent) cite risks associated with their use of hedging arrangements to offset commodity price fluctuations. While oil prices have seen relative stability in recent years, domestic natural gas prices remain persistently low, and any oil and gas companies entering into hedging agreements in the current pricing environment could lose out on potential profits should prices increase, according to BDO. Concern that counterparties to these derivatives transactions may default is of specific concern, as noted by 65 percent of companies. Hydraulic fracturing, or fracking, and related technology, poses unique challenges. Although some claim this has been the cornerstone of the United States' energy boom, it is still a relatively new technology, and the regulatory environment surrounding its use continues to evolve. Of the companies that reference operational risks in their 10-K filings, nearly one in four specifically cites the use of fracking and horizontal drilling technology as a concern. Meanwhile, 85 percent say regulation associated with fracking is a risk this year -- nearly double that of 2011. Nevertheless, the lack of significant increase this year (the sentiment was consistent with 2013) suggests that companies are more prepared for regulation and are seeking to cooperate with both the government and public to manage fracking's potential impact on communities, the land and the environment, according to BDO. For more:
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