Energy Outlook: Stormy skies blow cautious optimism out the window
December 7, 2015 | By
Barbara Vergetis Lundin
Though 2015 got off to a rocky start for the energy sector, chief financial officers (CFO) seemed cautiously optimistic that the oil price slump would be short-lived, according to BDO USA's 2015 study; however, the anticipated recovery has yet to materialize, and CFOs now expect the pain to continue well into 2016. That is according to BDO USA's 2016 Energy Outlook Survey, which found that 60 percent of energy CFOs expect changes in oil and gas prices to be the single most important factor dictating whether the industry recovers in the coming year -- more than double the number expressing similar sentiments last year. Low oil prices have forced a number of upstream energy companies to reassess their current portfolios and make strategic cuts in an effort to save. With oil giants like Shell and Statoil announcing plans to abandon major drilling projects, it comes as little surprise that more than half of the CFOs surveyed (53 percent) say they have experienced project terminations or delays in the past year -- up from 27 percent and the highest proportion reporting cancellations since the last industry downturn. Of those respondents experiencing project disruptions, an overwhelming majority (96 percent) cite poor project economics as the leading cause. "2015 was a difficult year for the U.S. energy sector as we exited the boom period and entered a bust phase," said Charles Dewhurst, leader of the Natural Resources practice at BDO. "Though the industry has historically been able to bounce back fairly quickly, the duration of the current price decline is forcing companies to step back and identify ways to survive with fewer resources at their disposal and no clear end in sight." Aggravating the tenuous industry environment is continued uncertainty about the economy and whether low prices will help move the oil demand curve in the coming year. This year, 56 percent of CFOs say they feel worse about the U.S. economy and its impact on demand for oil and gas products, in contrast to last year, when nearly two-thirds felt better about economic conditions. CFOs are similarly negative that demand will grow substantially in 2016, with only 28 percent and 38 percent expecting global and domestic oil demand to increase, respectively. This aligns with recent projections from the International Energy Agency, which estimates global demand reaching just 900,000 barrels per day through 2020. Managing supply will be critical to industry rightsizing. With global oversupply continuing to hold prices down, the CFOs surveyed expect to see supply cuts in the year ahead. Forty-three percent believe the domestic supply of oil will decrease -- a nearly threefold increase over the number expecting declines in 2015 -- and 17 percent plan to decrease their own exploration activities in an effort to improve profitability. While the crash of the oil market remains top of mind for the industry, CFOs are also carefully watching natural gas inventory and prices. Oversupply and lower prices are squeezing natural gas producers, with December delivery prices on the New York Mercantile Exchange hovering around $2 per million British thermal units. As a result, only 40 percent of CFOs expect the domestic supply of natural gas to increase in the coming year -- a decrease of 38 percent from last year's survey (64 percent). Nevertheless, CFOs are somewhat optimistic that demand will remain robust, as 46 percent believe global demand for natural gas will increase in the next year, and more than half (54 percent) say domestic demand will grow, as well. The looming general election highlights lingering regulatory concerns. When asked about their leading political concerns in 2016, nearly one-third of CFOs said the upcoming general election worries them most -- double the number expressing this concern last year. Meanwhile, 29 percent cite more restrictive government regulations, down from 38 percent last year. "Though concerns surrounding the regulatory environment nominally declined this year, the uptick in anxiety around the general election highlights continued uncertainty throughout the industry," said Clark Sackschewsky, partner with BDO's Natural Resources practice. "The Obama administration has put numerous stakes in the ground on energy policy, from incentivizing alternative energy production to rejecting the Keystone XL pipeline, but it remains unknown which policies and regulations the next administration will affirm, reject or introduce." For more: © 2015 FierceMarkets, a division of Questex, LLC. All rights reserved. |