A turnaround in oil and natural gas prices is paramount to the recovery of U.S. upstream operators, according to a survey of 100 financial chiefs.
BDO USA LLP's eighth annual Energy Outlook Survey, conducted nationwide from September through November, found less optimism than a year ago among CFOs at U.S. exploration and production (E&P) companies. The executives expect a turbulent 2016, and most are pessimistic about economic conditions.
The recovery that was expected by late 2014 has yet to materialize, and the pain is seen continuing well into 2016.
"2015 was a difficult year for the U.S. energy sector as we exited the boom period and entered a bust phase," said BDO's Charles Dewhurst, leader of the natural resources practice. "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."
Pricing and supply concerns extend to natural gas.
"While the crash of the oil market remains top of mind for the industry, CFOs are also carefully watching natural gas inventory and prices," the BDO survey said. "Oversupply and lower prices are squeezing natural gas producers, with December delivery prices on the New York Mercantile Exchange hovering around $2.00/MMBtu. As a result, only 40% of CFOs expect the domestic supply of natural gas to increase in the coming year, a decrease of 38% from last year's survey (64%)."
However, the CFOS surveyed said they were "somewhat optimistic" that gas demand would remain robust. Forty-six percent expect global demand for natural gas to increase in the next year, and more than half (54%) expect domestic demand to grow as well.
Low commodity prices have forced many upstream operators to reassess portfolios and make strategic cuts. It was "little surprise that more than half of the CFOs surveyed (53%) say they have experienced project terminations or delays in the past year," the survey said.
"This is up from 27% in last year's study and is the highest proportion reporting cancellations since the last industry downturn." Of those experiencing project disruptions, nearly all -- 96% -- cited "poor project economics" as the leading cause for the projects to be cut.
What's aggravated 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."
More than half (56%) of the CFOs said they feel worse about the U.S. economy and demand for oil and gas products. A year ago, close to two-thirds were optimistic about economic conditions.
"CFOs are similarly pessimistic that demand will grow substantially in 2016, with only 28% and 38% expecting global and domestic oil demand to increase, respectively. This aligns with recent projections from the International Energy Agency (IEA), which estimates global demand reaching just 900,000 b/d through 2020." IEA's projections for 2016 demand initially were issued last July (see Daily GPI,July 10).
The survey also found that managing oil and gas supply is considered critical to rightsizing the industry.
"With global oversupply continuing to hold prices down, the CFOs surveyed expect to see supply cuts in the year ahead," BDO said. "Forty-three percent believe the domestic supply of oil will decrease -- a nearly threefold increase over the number expecting declines in 2015 -- and 17% plan to decrease their own exploration activities in an effort to improve profitability." As OPEC "continues its game of oil price brinksmanship by flooding the market with supply, 41% of CFOs say the organization's actions will be the foremost influencer of commodity price volatility in the next year."
Next year's general election is on the minds of executives, the survey found.
"When asked about their leading political concerns in 2016, nearly one-third of CFOs said that the upcoming general election worries them most, approximately double the number expressing this concern last year." Meanwhile, 29% cited more restrictive government regulations, down from 38% 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 BDO's Clark Sackschewsky, a partner in the 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."
Each quarter Sanford Bernstein analysts take the pulse of energy investors via the Bernstein Energy Investor Sentiment Survey. The latest survey was conducted from Dec. 3-11, with only 62 responses, "the lowest response in history," which might signal a bottom said analyst Bob Brackett.
For natural gas, prices are not expected to be higher in the long or short term.
"The $2.00-2.49/Mcf bucket received 37% of votes (versus 6% last quarter). The $2.50-2.99/Mcf bucket received 50% of votes."
About half of those responding (49%) said they believe the oil E&Ps have the most upside going forward. And investors' expectations about oil prices "continue to be at all-time highs compared to strip prices," with respondents standing at 28% above for the next 12 months and 34% above the two-year oil price strip.