Investor sentiment has been sour of late toward oil and natural gas producers, but for North American operators, the bright spot has been “resilience in reserves vitality,” according to BDO.

Although oil prices were beginning to slowly climb — before the United Kingdom (UK) voted to leave the European Union — independent producers still had a long way to go before returning to healthy growth, BDO researchers said Monday. The near-term outlook for the middle market producers is “bleak,” as the median market cap fell by more than half (58%) between 2014 and 2015, from $219 million to $91 million. Middle market producers generally were defined as companies with annual revenues of $50 million to $1.5 billion.

Historic price-earnings (PE) ratios also have taken it on the chin, with the median historic PE ratio falling to 6.4 from 12.4 in 2015 and from an overall high of 25.6 in 2010. The sector now may be poised to make a “steadier — and arguably more sustainable — recovery,” researchers said. The study was completed before the referendum last week in the UK resulted in a vote to exit the European Union. The overall impact on the energy complex remains unknown (see Shale Daily, June 24).

“The middle market has been instrumental in the growth of the international energy sector, helping to decentralize the industry and spread the wealth well beyond OPEC to all corners of the globe,” said BDO’s Charles Dewhurst, global leader of the natural resources industry group. “But the rapid growth we saw over the past decade was unlikely to last, and it appears that many may have lost sight of the energy industry’s susceptibility to boom-and-bust cycles. But now that the oil price downturn has checked our collective hubris, we are in a position to reorient, reevaluate and rebuild.”

The BDO 2016 Global Energy Middle Market Monitor reviewed and analyzed financial data from 2010 to 2015 reported by 304 publicly traded middle market oil and gas companies from 37 country and international stock exchanges. The companies analyzed reported revenues up to $1.5 billion, with median revenue of $67.6 million. Companies were primarily traded on exchanges in Australia, Canada, the UK and the United States.

The industry is struggling with declining revenues and profits, researchers said. Year/year changes in median annual revenue underlined the pain of the price slump last year, as all companies assessed saw a decline overall of 30%, from $96.9 million in 2014 to $67.6 million in 2015.

“As revenues have slipped, so have profits for middle market oil and gas companies,” BDO said. “Globally, median pre-tax income declined from $5.9 million in 2014 to a net loss of $30.2 million in 2015, an overwhelming 614% decrease. After taxes, net income dropped from $5.1 million to a loss of $30.5 million, a seven-fold decline.”

Companies also are fighting to secure needed capital as margins and investor confidence have slipped. Producers were more leveraged in 2014 as they turned to debt financing to weather the downturn in prices, a trend that continued in 2015.

“The median debt ratio grew by nearly 25% this year, with Australia seeing debt ratios double,” according to BDO. “Meanwhile, the UK saw a modest 11% increase, while Canada and the U.S. saw median debt ratios largely in line with global trends.”

Meanwhile, North American companies saw “resilience in reserves vitality,” the study found.

“Despite a daunting industry outlook, North American companies have found one bright point: robust reserves vitality. While median reserves in general have fallen 35% over the past year — from 51 million boe to 33 million boe — the median reserve replacement rate remains at 101%,” researchers said. “Though less than last year’s median replacement rate, which reached more than 250%, the figure nevertheless demonstrates middle market North American companies’ ability to maintain momentum in the midst of declining prices.”