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U.S. Energy CFOs See Higher Global Natural Gas Demand in 2014

The U.S. energy industry is experiencing a rebound in confidence and financial stability as the unconventional oil and natural gas boom continues, according to a survey of 100 oil and gas chief financial officers.

The BDO USA LLP's annual energy outlook survey indicated that almost three-quarters (71%) of the CFOs queried are more optimistic about their companies' ability in 2014 to access capital and credit, versus 2013, when 51% said they were optimistic (see Daily GPI, Jan. 10). The big jump in enthusiasm appears to be driven by an improvement in U.S. capital markets and a "healthy" global demand for domestic resources.

Almost two-thirds of those responding (64%) expect global demand for natural gas to increase in 2014, with a similar number (65%) forecasting more demand for oil resources.

"Oil and gas executives can feel relatively secure in their finances this coming year as the U.S. energy industry continues to gain momentum," said BDO's Charles Dewhurst, who leads the Natural Resources practice. "Not only is our economy improving, but with demand exploding worldwide, new doors are opening for increased revenue.

"We are seeing significant foreign investments flowing into U.S. assets, as well as a growing need for U.S. oil and gas globally -- and the price differential is quite favorable for us."

However, the financial chiefs are planning to proceed with caution, prioritizing efficiencies over expansion, the survey found.

Merger and acquisition (M&A) activity is expected to stabilize in the coming year, the CFOs said, but more than half anticipate no changes in deal flow and about 43% are forecasting growth.

"This contrasts with last year's projections, when more than 50% of CFOs expected to see a rise in M&A activity," BDO researchers noted. "CFOs have likely been chastened by slowed deal flow in 2013."

Two years ago there was a "torrid deal pace," with energy consultant PLS Inc. and Derrick Petroleum Services reporting $83 billion in U.S. M&A activity. As of 3Q2013, however, the United States for the year had only a total of $34 billion of deal activity (see Daily GPI, Oct. 14).

"A plurality (38%) of CFOs expect that the primary driver of M&A activity in 2014 will be increasing revenue and profitability, as opposed to undervalued oil and gas assets (27%) or a desire to increase market share (15%)," BDO noted.

Energy operators plan to focus "inward" in 2014, by working to streamline operations and reduce costs.

"When asked how they plan to bolster profitability, one-third of CFOs cite improving internal business processes as a top tactic. Only a quarter anticipate investment in new technologies, while a mere 9% plan to pursue vertical integration through acquisitions," the survey found.

Nearly one-in-four CFOs expect to scale down their business, with 12% reducing exploration and 11% citing staff cuts. A plurality (38%) said the cost reduction programs are part of an effort to increase shareholder value, more than half again higher than the 2012 survey.

Almost half (45%) of the financial officers cited traditional debt financing as the preferred source of outside capital, but private equity (PE) is still a draw, with 40% of those surveyed planning to tap PE funding in 2014 to finance activities.

"Private equity is becoming an increasingly important way not only for companies to finance capital improvements and infrastructure development, but also for investors to take advantage of the strong return on investment offered by the United States' ongoing shale renaissance," said BDO's team.

Most CFOs (63%) don't anticipate adding personnel in 2014, with almost half (49%) expecting labor costs to increase by as much as 15%, with 12% of the respondents expecting labor costs to increase even more.

"The labor market hasn't yet caught up to the growth of the U.S. oil and gas industry," said BDO's Lance Froelich, a senior director of compensation consulting. "A very significant percentage of open positions are being filled by buying talent, and this phenomenon is driving salaries, sign-on incentives and special perquisites higher."

Financial officers also are seeking "environmentally responsible ways" to exploit domestic oil and gas resources.

"With hydraulic fracturing sustaining ongoing scrutiny from the government and public alike, 61% of CFOs indicate that they plan to increase their capital investment in environmentally friendly exploration and production processes. This represents a 15% increase over last year's proportion."

Although well more than half (60%) of the respondents expect to increase their investments in unconventional resources, such as shale, said the survey, "this suggests that U.S. energy companies have accepted that environmental stewardship must be a crucial component of their business plans."

The nationwide telephone survey represented a sample of oil and gas exploration and processing firms with revenues ranging between $76,000 and $1.2 billion, and an average revenue of $154 million.

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