2017 BDO Oil & Gas RiskFactor Report

July 2017

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​The 2017 BDO Oil & Gas RiskFactor Report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. oil & gas companies. The factors are analyzed and ranked by the percentage of companies that cite them.

Big Energy is feeling optimistic—but cautiously so. With more than half of 2017 behind us, oil & gas companies are tempering a hopeful outlook with practical realism as they balance on a tightrope of fluctuating commodity prices, dynamic economic and political developments (including a new U.S. administration and diplomatic crises in the Middle East), labor concerns, changes in supply and demand and more.

While numerous positive developments—including a slight boost in global commodity prices due to OPEC’s production cut and other factors—have come to light, the embattled sector still faces many uncertainties in the months ahead.
 
 

Top 20 Risk Factors for Oil & Gas Companies


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Show Me the Money: Energy’s Economic Woes

Reflecting 2015 and 2016 industry sentiment, economic woes continue to top the list of business risks, with nearly all (99 percent) energy companies citing general national and worldwide economic conditions as a major concern. Market volatility— most notably the fluctuations in the price of oil, gas and energy commodities cited by all 100 companies in the study—continues to be a wild card, sparked by dramatic shifts in supply and demand fundamentals.

The ability to access capital, cited by 95 percent of companies, also ranks in the top 10 risks—perhaps unsurprising when reflecting upon the industry’s prolonged financial struggles since the start of the oil bust in 2014. Factors that could contribute 100% #1: Market volatility and fluctuations in commodity prices 100% in 2016 95% Limited access to capital 96% in 2016 81% Increasing operating costs 59% in 2016 29% Bankruptcy 19% in 2016 to this concern include increases in operating costs (81 percent, up from 59 percent in 2016); creditworthiness and financial risks tied to partners, customers, suppliers and vendors (78 percent); and potential downgrades in credit ratings (45 percent, up from 25 percent in 2015).

And then there is the ultimate nightmare of bankruptcy, cited by over a quarter of companies (29 percent), a significant 10 percentage point increase from 2016 (19 percent) and more than triple that of 2015 levels (8 percent). This is also perhaps unsurprising when considering the high number of bankruptcies filed last year. 

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“The pricing ups and downs of the last few years have placed tremendous financial strain on many energy companies, with far-reaching consequences for not only the producers, but also the companies that provide oilfield services and equipment to them. However, these challenges have also encouraged innovation in unprecedented ways—forcing companies to look outside their comfort zones to push the boundaries of what they think they can do.’ proactive responses to these vulnerabilities will ultimately determine their fate.”     

2017-Oil-Gas-RFR-headshot_Karampelas.jpg  Basil Karampelas
  Managing director in BDO’s Business Restructuring and Turnaround Services practice

 


Shifting Politics Domestically and Abroad

From the new U.S. administration to turmoil in the Middle East to trade agreements in limbo, political developments on the U.S. and international stages have made political risks top of mind for energy companies this year: 85 percent of companies in the study are concerned about political instability interrupting their business operations.

Forty-five percent specifically worry about risks to their international operations, including those related to currency exchange rates (27 percent), changing trade agreements and restrictions on business from foreign governments (22 percent). Forty-one percent listed risks related to the new U.S. administration.

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“Political turmoil and international tensions continue to be top of mind for many energy companies, especially when considering many of the recent geopolitical developments. From shifting trade alliances and policies to the introduction of new global, national and industry-specific regulations, this year has already proved that companies must be vigilant and ready to adapt to the changes ahead.”     

2017-Oil-Gas-RFR-headshot_Dewhurst.jpg   Charles Dewhurst 
   International liaison partner and leader of BDO’s Global Natural Resources practice

 



Navigating U.S. Regulatory, Tax & Compliance Risks

A change in the U.S. administration means a change in the status quo—and the introduction of a new set of risks. Rhetoric around tax reform has prompted 89 percent of oil & gas companies to cite concerns over changes to federal tax policy, while worries about meeting environmental, accounting and financial reporting guidelines continue to loom large. With regulatory uncertainty casting a cloud over the sector, companies are exhibiting extra caution when figuring out how to navigate the choppy waters ahead.
   


Smooth Operator

Oil and gas companies are mindful of the many inherent operational risks that come with managing a complex supply chain. General supply risks, including those found in expanding and replacing reserves, developing new drilling prospects, and accessing or acquiring production facilities, remain top-of-mind, as well as business continuity risks ranging from natural disasters to injuries and accidents. Meanwhile, the rapid adoption of technology introduces new cybersecurity concerns that threaten some of the nation's most critical infrastructure.
   


Competition Amidst Transition

Competition, the 10th most frequently cited risk factor in this year's oil & gas companies' 10-Ks, has never been fiercer, with many U.S. companies eyeing foreign companies, alternative energy and other energy efficiency initiatives as threats to what has recently been a boon in U.S. petroleum production. As competition heats up in the year ahead, companies look to diversify their energy portfolio and innovate current processes to keep ahead of the game.
 
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For more information on BDO USA's service offerings to this industry, please contact one of the following practice leaders:
 

Charles Dewhurst
Houston

 

Rocky Horvath
Houston


 
Tom Elder 
Houston
  Rafael Ortiz
San Antonio

 
Richard Bogatto 
Houston
  Clark Sackschewsky
Houston

 

Vicky Gregorcyk 
Houston

 

Alan Stevens 
Dallas