E+P Trends

EP TRENDS 01

New survey results suggest the exploration and production industry is turning a corner.

By Kevin Schroeder

With the worst of the industry downturn behind them, E&P operators are turning attention to new opportunities in these more favorable economic – and regulatory – times. The industry is getting used to the “new normal,” with crude trading around $45 to $55 per barrel during 2017, and many companies are reinventing themselves to be profitable at this level. 

And despite ongoing price and inventory fluctuations, and global uncertainties – including the decision by some OPEC countries to cut diplomatic and transport ties with Qatar – U.S. companies are getting comfortable being uncomfortable.

This spring, Grant Thornton and Hart Energy surveyed more than 500 C-suite and senior industry executives. We found that companies are moving ahead with ideas and actions to achieve cost efficiency and smooth the extremes of the “boom or bust” cycle by focusing on a few key areas. Almost 40 percent of respondents say their primary strategy for the next few years is to pull back to a few core areas and sharpen their focus on those. They can do this by investing in technology for better access to data from the field, pursuing good deals for acquisitions and creating the right culture to attract and retain talent.  

The Power of Technology 

For the past three years, our survey respondents have told us that the information most important – and most difficult to obtain – is play/basin analytics. But now we’re seeing companies making investments to turn this around. Significant technological advances in the drilling and completion processes, use of real-time data, analytics and cloud computing offer great advantages and have driven down the time and cost of shale oil and gas extraction.

Integrated technology platforms allow for multi-user viewing at multiple sites, and sensors and drones provide rich and useful field data that’s easier to analyze. And when companies have state-of-the-art technology and talented employees to analyze the data they gather, they can optimize day-to-day operations, respond more quickly and effectively to emergency situations, and undertake the data analysis that gives them a more macro-level view of the business.

The Need for Talent 

More than a third of survey respondents are in hiring mode this year. Many talented employees left the industry during the downturn for more stable industries. Companies need to address culture issues to entice them back and attract new employees, including data scientists and people with strong technical abilities. Some companies, like GE Oil and Gas, have rebranded themselves to appeal to today’s workers, including putting real weight behind inclusion and diversity programs.

The Opportunity to Grow Through Acquisition 

The deal-making environment is improving. In 2015, 53 percent of survey respondents said the major barrier to M&A was the significant disconnect between buyer and seller price. In 2017, that number fell to just 24 percent. Just over 25 percent of survey respondents say they are eyeing acquisitions.

Companies are looking to pursue strategic bolt-ons to existing portfolio acreage, and blocking up acreage with smaller trades and purchases. Some companies say they are viewing acquisitions and divestitures as a way to strength the balance sheet. 

However, the cost to acquire acreage is still high in many places and too often excluded from the company’s analysis of ROI/per well results. It’s important that acquisitions are in line with strategy – expansion of core areas, or filling in acreage to support longer lateral drilling in core basins. If it involves diversification into other basins, companies should be sure they also have the right experience and the necessary capital to acquire, develop and perhaps explore, and address infrastructure needs.

Welcome relief from regulatory pressure – In 2016, more than half of survey respondents said regulatory hurdles and delays represented the most significant risk. In our latest survey, we saw a dramatic drop to just 39 percent of respondents, with more than 85 percent saying they have little to no concern that state, local and federal regulations will restrict them. President Trump has signaled his support of the industry, signing executive orders to clear the way for the opening of the Dakota Access pipeline and expansion of drilling in the Arctic and Atlantic oceans. 

We hope that improved relations between policymakers and the industry helps pave the way for a coordinated national energy policy that thoughtfully considers the risks and benefits of an “all-of-the-above” national energy strategy. Forty-three percent of survey respondents say that industry activity data is the most valuable data asset, reflecting the belief that improved collaboration through a national energy strategy would help them make better decisions to help protect against the vicissitudes of boom and bust.

Producers’ resiliency and relentless drive to reduce costs and make smart investments for the future are very encouraging. The future still really does depend on the ability of the industry to innovate, as oil prices likely will remain relatively low with continued uncertainty.

Kevin Schroeder is industry managing partner in energy for Grant Thornton LLP. The Grant Thornton/Hart Energy Survey is conducted annually by Grant Thornton in collaboration with Hart Energy. The 2017 survey results are based on answers from 510 respondents collected in March and April 2017.  

 

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