CHARLES DEWHURST, BDO, HOUSTON
OIL PRICES HAVE STARTED TO RECOVER, BUT IS THE INDUSTRY FOLLOWING?
Risk factors in oil and gas
AS THIS IS WRITTEN in Q3 of 2016, the energy industry is holding
onto a faint glimmer of hope that the downturn is now behind us.
Oil prices have hovered near $50 per barrel for about a month now,
buoyed by tightening supply, improving global demand and—at
least prior to the Brexit vote—favorable market conditions. But
according to recent analyses from BDO USA, we may still be a long
way away from a full recovery.
For the past six years, BDO’s Oil & Gas RiskFactor Report has
reviewed the risks listed in the 10-Ks of the top 100 publicly traded
US exploration and production companies and ranked those risks
according to frequency cited. According to this year’s study, volatile
commodity prices once again top the list of business threats, cited
by all companies we analyzed. Price fluctuations remain a perennial
risk to oil and gas businesses regardless of the broader health of
the industry, and can have significant repercussions throughout
all areas of a company’s operations—but unsurprisingly, almost all
of those consequences originate at the financial level as low prices
reduce companies’ cash flow to a trickle.
But what do these consequences actually look like? To develop
a better sense of the true cost of the price decline, BDO also looked
at the financial performance of more than 300 publicly traded
middle market oil and gas companies from around the world for
our second annual Global Energy Middle Market Monitor. The
study analyzes companies’ revenues, profitability, debt ratios, and
more to glean a holistic picture of the health of energy industry.
This year’s assessment reveals substantial revenue losses, over-
whelming debt burdens, and wavering investor confidence.
The data points to a difficult road ahead for oil and gas companies. Not only must prices remain stable (or ideally, increase further),
companies must also dig themselves out of financial holes, reassure
skittish investors, and streamline their E&P activities to right the
ship and navigate toward growth and prosperity.
GRAPPLING WITH FINANCIAL OBSTACLES
AND INVESTOR ANXIETY
According to the Middle Market Monitor, year-over-year changes
in median annual revenue highlight how hard the price slump truly
hit the global energy sector in 2015. Median revenue across all
companies assessed fell by about 30% -- from $96.9 million in 2014
to $67.6 million in 2015—and as revenues have slipped, so have
profits. Globally, median pre-tax income declined from $5.9 million
in 2014 to a net loss of $30.2 million in 2015. After taxes, net income
dropped from $5.1 million to a loss of $30.5 million—a seven-fold
Investors have begun to sour on middle market oil and gas
companies as a result. The median market cap across all companies