State of the Industry

State of the Ind

After turning the corner on a deep and prolonged downturn, the E&P sector

finds itself emerging into a brighter but still uncertain future. 

By Kevin Schroeder

The recovery in crude oil pricing is adding optimism to the industry. In Grant Thornton/Hart Energy’s 2016 energy survey, more respondents said they planned to increase capital spending in the United States, and almost half want to increase M&A and make strategic deals.

We’re seeing the optimism in action: Recent Baker Hughes data show nationwide rig counts are up nearly 340 rigs since the trough in 2016. The biggest winner in all of this is the Permian Basin in west Texas and southeast New Mexico. With excellent drilling economics and multiple stacked pay zones, the Permian Basin remains the hotbed of U.S. shale drilling.

Another hot play is the Oklahoma SCOOP/STACK, which also features multiple stacked pay zones. Drilling economics are continuing to rapidly improve in this play with rates of return in the sweet spots approaching that of the Delaware/Permian Basin. Other active areas include the DJ Basin, Marcellus Shale and some renewed activity in the Powder River Basin and Bakken.

Adding to the optimistic outlook, the new Republican administration appears to be friendly to the industry. President Trump signed an executive order to complete the Dakota Access and Keystone XL pipelines. The administration has signaled intent to look at bureaucratic overreach with possible repeal of rules that have a big impact on the industry, and it has promised to make leasing of federal lands quicker and easier.

But geopolitics remain a wild card. The industry counts on OPEC’s compliance with its self-imposed cuts in production for sustained pricing. There are indicators that OPEC might have the appetite for further cuts, which would speed drawdown of commercial oil inventories globally. Because of the unknowns regarding production from OPEC and a few non-OPEC nations and the historically high level of global oil inventories, concern will persist over the possibility of oversupply. 

Into this future we are talking to our clients about four courses of action: 

Shore up the balance sheet to focus on growth – In the downturn, the combination of falling profits and tightening credit markets led to an unprecedented industry-wide focus on balance sheets. Constraints may be easing, if only moderately. In our survey, fewer respondents than last year said obtaining capital is slightly or much more difficult (40 percent in 2016 versus 54 percent in 2015).

Funding acquisitions and drilling through cash-flow will be important in the industry going forward. Debt will be widely available, but given the current state of the industry and possible oversupply issues, it should be used prudently in limited circumstances.  We see E&P companies looking to restructure before debt obligations become difficult, if not impossible, to refinance. It’s noted that private equity firms have roughly $200 billion in cash in the early stages of deployment throughout the industry. 

Upgrade technology – While producers struggled to survive the downturn, technology became a lot more sophisticated. Producers realize that their technologies and systems — both in-house and in the field — are outdated and negatively affect operational efficiency. They know they may be missing out on the benefits of data analytics, cloud computing and improved communications.

In the survey, 25 percent of respondents indicated that access to relevant data for decision-making is their biggest technology infrastructure challenge. There is a benefit to improved real-time information. Well performance is an example – better use of real-time data could optimize decision-making. Out-of-date technology, specifically dated ERP systems, are particularly problematic for companies preparing for M&A.

Restore talent – In the wake of collapsing prices, circumstances dictated that producers make deep cuts in the workforce, but that trend is subsiding. About 31 percent of survey respondents are now hiring or plan to start hiring this year; only 14 percent plan further cuts. This will be challenging in an industry that faces a major “crew change” in the form of retiring workers by 2020-2021.

Finding skilled engineers, geologists and accounting and finance professionals with an oil and gas background will prove increasingly difficult. As one survey respondent said, “We need to expand staff, but finding qualified geoscientists and combating industry malaise remain a problem.”

Be open to industry alliances – When companies find common ground, they can all benefit. There are indications that producers are increasingly working together on mutual challenges. In our survey, 25 percent of respondents said the best way to achieve operational efficiencies was consolidating field services like water handling, recycling and disposal. Producers can also look for ways to collaborate on smart policy that helps them manage their business and helps the country manage its energy needs into the future.

We believe these four actions will help E&P companies find success in this environment: keep the balance sheet strong, make smart technology investments, hire and retain top talent, and find partners. It’s an exciting time. Fasten your seatbelts!  

Kevin Schroeder is national managing partner in energy for Grant Thornton LLP.

 

Check out our latest Edition!

 

Contact Us

Energy and Mining International

79 West Monroe St., Suite 400
Chicago, IL 60603  
312.676.1100  312.676.1101

Click here for a full list of contacts.

Latest Edition

Spread The Love

Back To Top