Oil price declines diminish energy sector enthusiasm

The US energy industry is continuing to struggle to find its footing as commodity prices remain stubbornly low. The ‘BDO Oil and Gas RiskFactor Report’ analyses the risk factors listed in the most recent 10-K filings of the 100 largest public US E&P companies, and has found that low prices are dampening companies’ enthusiasm for investing and expanding, and amplifying the potential impact of impediments to future growth.

For the first time, the study has said that risks related to replacing or expanding reserves was the most frequently cited threat, with all companies indicating low prices are inhibiting their ability to make key investments in maintaining supply. According to IHS, the pain is widespread. The number of newly discovered oil and gas reserves hit a 20 year low last year. Amid this uncertain supply environment, 82% of companies also expect to experience shortages in rigs, equipment and personnel, further constraining their ability to keep up production. This represents a 5% jump in the number of companies citing similar concerns in last year’s study.

Charles Dewhurst, leader of the Natural Resources practice at BDO said, “many in the oil and gas industry expected the commodity pricing environments to improve fairly quickly, but a variety of market forces, including growing supply in the Middle East and difficulties exporting US resources abroad have conspired to hit US producers’ bottom lines hard. Ironically enough, the resulting lack of domestic supply may help push prices back up, but for now, it appears that US companies are poised to feel the most pain as the market corrects itself.”

Accounting related risks

Moreover, it has been found that the decline in oil prices over the last year is also driving increased worry about accounting related risks, such as maintaining internal controls and complying with accounting regulations. The number of companies citing this risk increased by 47%, with 84% of companies noting it in their 10-Ks. While low prices continue to force companies to record impairments on their balance sheets, intensified scrutiny from the SEC and PCAOB is simultaneously drawing renewed attention to more stringent financial reporting, meaning E&P companies must devote their ever growing attention and resources to maintaining their books.

Edited from press release by Claira Lloyd

Published on 06/05/2015

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