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U.S. E&Ps Again Cite Regulatory Oversight, Commodity Prices as Main Concerns

Regulatory changes and commodity price volatility continue to be the major risks facing U.S. exploration and production (E&P) companies, based on recent U.S. Securities and Exchange Commission Form 10-K filings by the top 100 public companies.

The 20 leading industry risks, including those for hydraulic fracturing (fracking), "continue to hold steady, with few new concerns bubbling up," according to the BDO Oil and Gas RiskFactor Report, which used the public filings to complete an analysis of the top 100 based on revenue. The fourth annual report examined the risk factors listed by the E&Ps and ranked them in order of the frequency cited, similar to the previous surveys (see Shale DailyJune 5, 2013).

The consistency of the two leading risks over the past four years -- regulatory changes and commodity price volatility -- suggest that companies remain primarily concerned about interruptions to the industry's ongoing growth, the authors noted. However, there are two emerging risks that the filings indicated: demand for qualified leadership and the ability to recover undeveloped resources.

“The nonconventional oil and gas industry is a highly competitive space, with new wells coming online and more companies entering the game all the time," said Charles Dewhurst, who leads the natural resources practice for BDO USA LLP. "As the industry continues its upward trajectory, we may expect to see a growing number of companies vying for a relatively static and selective pool of prospects, leadership and labor."

In this year's survey, 80 companies cited the ability to attract and retain key personnel as a top risk, up by almost 10% from a year ago.

"As the sector continues to grow, the number of operational entities has proliferated, with the U.S. Bureau of Labor Statistics indicating that the number of active E&P companies increased by about 27% between 2003 and 2012," the report noted. "As a result of this growth, competition to attract a selective group of highly qualified executives has intensified."

About 81% expressed "increasing apprehension that they may be unable to recover their undeveloped reserves economically or before their leases expire. This marks a one-third increase since 2013."

The risk most frequently cited -- increasing federal, state and international regulations -- has been an ongoing trend.

"All companies analyzed list regulation as a risk, and this year, there was a slight uptick (2%) in the number of companies mentioning health and environmental regulation."

Few organizations cited climate change and greenhouse gas regulations as a risk. The recent U.S. Supreme Court ruling empowering the Environmental Protection Agency (EPA) to take stronger action on carbon emissions may ultimately have unanticipated reverberations from upstream to downstream, said the authors.

Standard & Poor's Ratings Services in a report Wednesday said extreme weather events were responsible for 90% of documented natural catastrophe loss events in 2013, causing $124.5 billion of overall losses out of the $135 billion total natural catastrophe losses. "We think industry regulators and investors are likely to focus more closely on climate and carbon risks as an indicator of company performance and, for the latter, value," analysts said.

Most companies (85%) surveyed by BDO said they had risks associated with using hedging instruments to offset commodity price fluctuations, not a surprise.

"Many oil and gas companies entering into hedging agreements in the current pricing environment could lose out on potential profits should prices increase," BDO noted. "Many also express concern that counterparties to these derivatives transactions may default -- a risk specifically noted by 65%."

Regarding fracking risks, the companies referenced operational risks in their 10-Ks, with about one in four specifically using the terms fracking and horizontal drilling technology as concerns. Last year's analysis was the first in which fracking was named as a top 20 risk. Eighty-five percent of the companies reports this year said regulation associated with fracking was a risk factor, consistent with 2013 and almost double those citing it in BDO's inaugural report in 2011.

"Nevertheless, the lack of significant increase this year suggests that companies are more prepared for regulation and are seeking to cooperate with both the government and public to manage fracking's potential impact on communities, the land and the environment."

The findings on fracking risks appear to mirror some statements made by industry representatives during an oversight hearing Tuesday of a subcommittee of the House Committee on Natural Resources (see Daily GPIMay 20). Some of those testifying said the industry recognizes that it is in its best interest to assure the public that fracking is being done safely, but it is wary of government oversight. EPA issued an advance notice of a proposed rulemaking earlier this month to seek comments on what fracking chemicals and mixtures should be disclosed by operators (see Shale Daily, May 9).

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