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US energy CFOs feeling optimistic

Hydrocarbon Engineering,

According to a recent survey of 100 US oil and gas chief financial officers, by BDO USA LLP, 71% feel better about their companies’ ability to access capital and credit in 2014 as compared to this year, a 20% increase on last year’s sentiments. It is thought that the continuing US shale boom and the economy slowly but steadily improving is encouraging this response and an increase in confidence and financial stability. Also, improvement in capital markets and a healthy international demand for US resources is being credited. 64% of CFOs are anticipating that global demand for natural gas will grow in 2014 and 65% expect a similar situation for oil.

‘Oil and gas executives can feel relatively secure in their finances this coming year as the US energy industry continues to gain momentum,’ said Charles Dewhurst, partner and leader of the Natural Resources practice at BDO. ‘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 US assets, as well as a growing need for US oil and gas globally, and the price differential is quite favourable for us.’

Despite positive reactions, it does seem that CFOs are going to proceed with caution and prioritise efficiencies over expansions. During 2014, merger and acquisition (M&A) activity to stabilise, with more than 50% anticipating no change in deal flow and only 43% expecting an increase, most likely to the slowed deal flow in 2013. In 2012 a reported US$ 83 billion of deals were executed in the USA, this year only US$ 34 billion worth of activity has occurred. According to the survey, 38% of CFOs expect that the primary driver of M&A activity in 2014 will be increasing revenue and profitability.

Focusing inward

Reinforcing the caution voiced by responders, companies are looking to streamline operations and reduce costs in 2014 in an effort to entrench the gains of recent years. When asked to consider bolstering profitability, approximately 33% of CFOs cited improving internal business processes as a topic tactic. Only 25% anticipate investment in new technologies and only 9% plan to pursue vertical integration through acquisitions. When it comes to scaling down businesses, 1 in 4 expected that would have to be the case next year. 12% plan to reduce exploration and 11% expect staff cuts. In addition, 38% have said that cost reductions programs will be pursued in an effort to increase value for stakeholders.

Private equity

The survey found that 48% of CFOs prefer traditional debt financing as a source of outside capital, but private equity is keeping pace. 40% of CFOs are planning to tap private equity funds in the coming year 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 ongoing shale renaissance in the US.

Labour costs

63% of responding CFOs said they do not expect to increase the number of employees in 2014, but 49% are expecting labour costs to grow by as much as 15%. 12% expect increases to even exceed the 15% mark.

The environment

61% of CFOs said that the are planning to increase their capital investment in environmentally friendly E&P processes as there is ever increasing scrutiny surrounding hydraulic fracturing. 60% anticipate increasing their investment in non-conventional resources, such as shale, this suggests that US energy companies have accepted that environmental stewardship must be a crucial component of their business plans.

The survey

The BDO 2014 Energy Outlook Survey was carried out by telephone across the US. A selection of CFOs from oil and gas exploration and processing firms were spoken to directly between September and November 2013.

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