Despite a Turbulent 2014, U.S. Energy CFOs Expect Long-Term Prosperity

A tumultuous second half of 2014 served as a reality check for the U.S. oil and gas industry, landmarked by steep oil price declines and growing tensions with OPEC. Our seventh annual Energy Outlook Survey of 100 oil & gas chief financial officers found that CFOs have been rattled by the price fluctuations plaguing the industry and are concerned about their ability to remain profitable in the near term. However, the study also revealed that CFOs view these conditions as temporary, and an optimistic future lies ahead for companies that are able to remain nimble in this volatile environment.

In the short term, energy executives are wary of the impact of commodity price declines on their operations: 45 percent of CFOs expect low oil and gas prices to be their greatest financial challenge in 2015, a 55 percent increase from year’s study. At the same time, the number of CFOs citing price declines as a leading inhibitor of growth grew by 68 percent. And as global production continues to outpace demand, the energy industry does not expect this trend to abate anytime soon: only 37 percent of CFOs anticipate global demand will increase in 2015, down from 65 percent last year. In contrast to oil, however, CFOs are more confident in natural gas and expect to see an increase in production this year. Sixty-four percent expect the domestic supply to increase, with 55 percent believing domestic demand will grow in tandem. Nevertheless, these predictions are still less sunny than last year’s, suggesting that ripple effects from the oil industry are dampening enthusiasm. Difficulties accessing the market—including lagging permitting for LNG export facilities—may also be impacting projections. Yet, despite these challenges, executives are optimistic and expect long-term prosperity. The majority of CFOs feel better about their access to capital and credit than last year, and more than half (56 percent) expect to see an increased level of deal flow, a 30 percent increase over 2014's projections. This anticipated level of accelerated activity, along with the current price environment, spells good news for the private equity industry and buyers contemplating entry into the market. Lower valuations and the market's likely recovery leave PE funds well-positioned to reap great rewards from the investments they make now. What's more, two-thirds of CFOs believe energy exports will grow as the U.S. rises to meet global energy needs, and 44 percent of CFOs whose companies operate in the liquefied natural gas (LNG) market say they expect to increase their investment in LNG processing facilities. For those willing to weather the current environment, the combination of these factors could have all parties involved seeing a strong ROI in the future. That said, persisting legislative concerns continue to be top-of-mind for industry executives, with 43 percent expecting legislative and regulatory challenges to hamper industry growth to some degree. More specifically, CFOs are keeping careful watch on environmental regulations and are taking proactive steps to mitigate the impact of their activities. Sixty-one percent of CFOs say they will focus their risk management activities in 2015 on navigating environmental regulation, while others will look to minimize the effects of their shale extraction activities, citing water pollution and usage (34 percent) and hydraulic fracturing (33 percent) as priority areas. Consistent with last year's study, CFOs remain concerned about their ability to hire and retain highly-skilled employees. This year, 53 percent of CFOs predict their labor costs will increase, while only 35 percent say they expect their headcount will, as well. Powerful competitive forces both within the sector and among other industries have forced businesses toward more generous compensation and benefits packages in recent years, making their ability to attract top talent both more difficult and more expensive. Overall, our survey revealed that the industry remains optimistic and executives are proactively preparing for a return to normalcy. While price fluctuations and short-term challenges are top-of-mind for CFOs, the U.S. oil and gas industry is well-equipped to navigate this transitional period, and long-term prosperity lies ahead. This guest post has been written by Charles Dewhurst, leader of the Natural Resources practice at BDO USA. He can be reached at [email protected]

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