Natural Resources Record Newsletter - Spring 2017

April 2017


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Table of Contents


Potential Implications of a Destination-Basis Tax System for U.S. Energy Companies

By Clark Sackschewsky

The border-adjustment tax (BAT) proposal, contained in the House Republicans’ tax blueprint, A Better Way: Our Vision for a Confident America, seeks to change the way corporations are taxed. While the plan would cut the corporate tax rate from 35 to 20 percent, it also suggests transforming our tax regime from a worldwide approach to a destination-basis tax system with border adjustments. These border adjustments are among the proposals energy companies are watching most closely.

While subject to change as the administration further develops its tax reform policies, this so-called destination-basis tax system conceptually would tax companies on their sales to U.S. customers while excluding foreign sales from U.S. tax entirely. This means sales of imported goods would be fully taxable, whereas the sales of exported products would be exempt from tax. Further, the costs of goods, services and intangibles purchased from foreign parties and sold to U.S. customers would not be deductible from taxable income, as they currently are. This could be a game-changer for an industry that relies heavily on foreign barrels and deductions for intangible drilling costs.

Take a look at the graphic for an theoretical illustration of the border adjustment concept, assuming cost of goods sold is the same.


The proposed reform has received a mixed response from the oil and gas industry. According to a report from The Wall Street Journal, both the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers concluded in internal studies that a BAT could raise gasoline prices by 20 cents per gallon in the short term, though neither industry group has taken a public stance.

“The industry thinks Trump will be pro-energy. But this border tax thing scares folks to death,” an employee at a major oil services company told Politico.

“The U.S. energy industry is asking itself whether it exited an Obama-era regulatory slog just to end up in a Trump-era protectionist minefield,” Politico adds.

Not all is doom and gloom, however, and there are several companies that stand to gain from the BAT, at least in the short term. Goldman Sachs analysts concluded that border adjustments could result in a windfall for domestic producers and increase U.S. production in the near term, as the premium on foreign barrels encourages refiners to buy domestic.

The likely losers in this scenario? Coastal refiners that rely heavily on importing foreign crude and derive a small percentage of their revenues from exports. While the U.S. refining industry generally opposes the BAT, refiners based near the Gulf Coast with easy access to both domestic and foreign supplies seem to express neutral, if not slightly optimistic, views towards the proposal.

But the biggest loser may be the American consumer at the mercy of fuel price fluctuations: Barclays estimates the BAT would increase the average American family’s annual gasoline costs by $300-$400 a year. Proponents of the proposal have pushed back on these numbers, arguing that currency impacts would negate the effect on fuel prices. But their argument doesn’t negate longer-term concerns that the BAT may contribute to global oversupply and reignite the boom/bust cycle.

So where is this headed? Both the president and GOP leaders in Congress have embraced to varying degrees the notion of a destination-basis tax system. And while the future of the BAT is unclear, there is sure to be a great deal of discussion and debate about the shape of tax reform above and beyond the GOP’s initial proposal.

It’s important to pay close attention to the details of the upcoming wave of tax reform proposals to understand the implications for the energy industry. As the proposals continue to undergo debate, we’ll be watching to help you stay up-to-date and plan for future policy changes.

Clark Sackschewsky is the Tax Managing Principal for BDO’s Houston office. He can be reached at [email protected].


The Energy Industry: Promise & Opportunity in the Year Ahead

A CERAWeek 2017 Recap

By Charles Dewhurst

At this year’s annual IHS CERAWeek conference, I found myself in a room full of prominent international oil and gas leaders discussing the trends that would determine the industry’s direction over the next year. Unlike the subdued mood of last year’s gathering, there was a notable undercurrent of optimism among my colleagues this time around—a welcome change brought largely in part by the stabilizing crude price of approximately $50 per barrel, over the previous year’s all-time low.

While much of the industry continues to adopt a “wait-and-see” approach to pending and upcoming policies, it was apparent that OPEC’s November deal, combined with the rapid advancement of new technologies and global policy changes, has profoundly uplifted the sector’s overall sentiment—from one mired in uncertainty and doubt to one that sees promise in the year ahead

Here are my top four takeaways from CERAWeek 2017:

1. The potential for new business opportunities always exists, even during a downturn.
The last year has seen a slew of national and international policy changes that have rocked the energy world—from OPEC’s deal to cut oil production to President Trump’s election to a myriad of other country-specific regulatory changes with implications that echo globally. However, despite the multiple upturns and downturns that the industry has faced, my CERAWeek colleagues have demonstrated one fact: Even in difficult or uncertain times, new business opportunities and innovations can always be cultivated.

In one session in particular, several energy companies shared the tactics they used to innovate during a downturn, from cutting costs and selling off distressed assets to finding new investment opportunities and transforming initial challenges into areas of opportunity. In other sessions, conference participants spoke about seeing the opportunities from the changes ahead. My American colleagues, for example, discussed the ample opportunities that a deregulated environment under Trump could offer, including approval of the Keystone XL pipeline and an increase in liquefied natural gas facilitators and deep offshore drilling opportunities. My international colleagues expressed their optimism that the OPEC deal could maintain (or increase) crude prices while simultaneously encouraging domestic shale production. While much is to be determined, the ability to glean opportunities in difficult times is always critical.

2. Renewable energy remains top-of-mind as a growing population strains existing energy sources.
With the world population predicted to increase by 2 billion people over the next 20 years, finding sustainable renewable energy sources is no longer simply a “nice-to-have,” but a necessity to sustaining our population’s current and future levels of energy consumption. To move toward this goal, more players in the energy industry are diversifying their energy offerings. Increased investment in cleantech R&D, along with solar, wind, hydro and energy storage technologies, remains equally critical for both start-ups and energy incumbents. While clean energy initiatives vary by country—with the U.S.’ official stance on renewable energy still to be determined—there is no question that the development of clean energy is a step the industry needs to take to, quite literally, power itself into the future.

3. Challenges in talent recruitment and retention continue to hinder industry growth, despite rapid technological advancements.
The slew of new technological advancements, such as artificial intelligence, additive manufacturing and robotics, have benefited the energy sector in numerous ways, from decreasing costs to increasing operational efficiency and productivity. Nevertheless, the plethora of new technological developments have also amplified a challenge that the industry has long faced: a labor shortage due to the difficulty in recruiting and retaining skilled workers with the technological savvy and know-how that many new positions demand—a situation only worsened by the thousands of layoffs last year. With an aging workforce and a younger generation that often looks to employment opportunities elsewhere, the energy industry has a dire problem that it needs to solve fast, if it is to remain at, or increase, its current rate of innovation. Whether it entails promoting greater career growth opportunities, enhancing work-life balance or offering other benefits, energy companies need to cultivate company cultures that will appeal to the next generation of workers.

4. New emerging markets offer significant opportunities for expansion and growth.
In an era of increasing globalization, energy companies continue to look eagerly toward emerging markets for new business opportunities to reduce costs, optimize production and drive revenue. With oil prices slowly returning to their former levels, many emerging markets have seized the opportunity to reinvigorate their oil and gas industries. Argentina, under the leadership of Mauricio Marci, a pro-business leader, for example, has settled much of its debt and opened up new investment opportunities—especially in the large shale reserves in the southern Patagonia region. Mexico’s revamp of its national energy company and encouragement of foreign investment in the Gulf of Mexico’s deep-water deposits, considered by many to be the crown jewels of unchecked reserves, has similarly re-exposed the country to international markets and investors. At the same time, many challenges still exist. Canadian Prime Minister Justin Trudeau, CERAWeek’s keynote speaker, for example, expressed concern over many foreign investors’ hesitation in investing in Canada’s oil sands due to the high costs and environmental consequences involved. Depending on how the industry reacts to new global developments, we can expect to witness the rise and fall of several new international energy markets this year.

Charles Dewhurst is partner and leader of the global Natural Resources practice at BDO. He can be reached at [email protected].

The Role of CFIUS in Cross‑Border Energy M&A

By John Lash, Louise Sayers and Bryndon Kydd

Since the end of World War II, the United States has maintained and enjoyed an open posture toward foreign investment. In 2016, it remained the largest recipient of foreign direct investment (FDI) globally, with an estimated inflow of $385 billion—a marked 11 percent increase from the year prior. [1] Much of this amount stemmed from several multibillion-dollar cross-border merger and acquisition (M&A) deals, whose total value had increased 17 percent from 2015 levels.

While foreign buyers remain plentiful and varied, China—whose sights are still set on getting a strategic foothold in the U.S.—is likely to continue to be one of the U.S.’ largest investors, a development that has prompted some national anxiety to date. With national security an ever-present priority for the U.S. government, it can be expected that as foreign dealmaking increases, so will the regulatory scrutiny of these cross-border transactions.

The CFIUS Review Process

A critical element of FDI is the involvement of the Committee on Foreign Investment in the United States (CFIUS). Chaired by the U.S. Secretary of the Treasury, this interagency task force is responsible for the review of FDI that could result in the control of a U.S. business or U.S.-critical infrastructure—defined as “a system or asset, whether physical or virtual … vital to the United States”—as well as the impact these transactions could have on national security. [2]

While CFIUS review is not a mandatory process, many companies involved in cross-border deals will voluntarily notify CFIUS and initiate a review to gain the benefits of a safe harbor provision. This provision prevents future government challenges to the transaction, including unwinding it or requiring mitigating actions, should the review be cleared successfully. The review process includes up to three stages. The first stage begins with a 30-day initial assessment period, at which point a determination can be made. If unresolved concerns remain, the committee may initiate the second stage, a 45-day investigation period. Should that yield unsatisfactory results, a 15-day presidential review period begins, with the president rendering a final decision. Actual presidential decisions are rare, with only two transactions blocked during the Obama administration. Rather, most transactions are approved, adapted to mitigate CFIUS’ concerns or withdrawn by the parties if suspected that the transaction will not be approved.

Cross-Border Energy M&A

CFIUS filings have steadily increased over the last eight years, with companies in the aerospace and defense, manufacturing, critical technologies and natural resources industries filing the majority of notices. This increase reflects a similar increase in cross-border M&A in the natural resources industry. In fact, a 2016 Mergermarket report cited the energy, mining and utilities sector as the top sector attracting foreign M&A in the U.S., reaching an all-time-high deal value of approximately $337.4 billion across 439 transactions—a 64.3 percent increase from the same period in 2015. [3] Much of this increase can be attributed to several energy megadeals last year with Canada as a prominent buyer, including a $41 billion combination of Spectra Energy Corp (U.S.) and Enbridge Inc. (Canada) and an approximate $13 billion combination of TransCanada Corporation (Canada) and Columbia Pipeline Group, Inc. (U.S.), among others.

When evaluating energy M&A transactions, there are several national security concerns to consider. FDI that involves the U.S. energy grid—considered as “U.S.-critical infrastructure” by CFIUS—is especially susceptible to scrutiny. The grid, with its vast networks of distribution centers, power plants, transmission lines and “smart grid” technologies, is vulnerable to numerous national security risks that range from physical facility security, including the security of refineries, pipelines and supply chains, to location security, such as the proximity to military installations. Other major risks include those that may undermine U.S. and global supply chain reliability and security, as well as global trade compliance. Cybersecurity is also top-of-mind, with the security of IT infrastructure, such as those of refinery control systems, critical.

The Future of CFIUS

With the current administration’s heightened focus on national security, it will not be surprising to see CFIUS playing a larger role in cross-border M&A activity in the year ahead, with potentially more stringent reviews and/or an increased use of mitigation measures. The practical guidance for identifying factors that constitute a national security risk may also be broadened to include economic security, a net U.S.-benefit test.

The administration’s decisions regarding global trade partnerships—including its recent decision to withdraw from the Trans-Pacific Partnership (TPP)—may also lead to heavier scrutiny of deals proposed by geopolitical rivals versus those from “friendly” nations. These shifting relationships may also affect if and how the U.S. chooses to participate in parallel national security reviews with other countries. In addition, reciprocal market access may become a greater consideration factor in CFIUS review, with countries that do not “reciprocate,” or allow comparable U.S. investment in the same sector, facing more difficulties in obtaining CFIUS approvals than those that do.

Regardless of what lies ahead, natural resources companies must be cognizant of how an M&A transaction may impact the reliability, availability and integrity of their resources, transmissions and underlying protected information, as well as any direct or indirect impacts on the energy grid. The complexity of navigating the regulatory process will continue to increase in tandem with potential international interest in making investments in U.S. critical infrastructure. Nevertheless, an increase in cross-border M&A this year will be a favorable sign that the energy industry has finally started to experience the growth it has long hoped for, both domestically and abroad.

John Lash is a senior manager with BDO Consulting’s National Security Compliance practice, and can be reached at [email protected].

Bryndon Kydd is partner and leader of BDO Canada’s Natural Resources practice, and can be reached at [email protected].

Louise Sayers is an audit director and member of BDO United Kingdom’s Natural Resources practice, and can be reached at [email protected].

[1] Global Investment Trends Monitor: February 2017 (Vol. 25, Rep. No. 25). (n.d.). United Nations (UNCTAD). Retrieved from
[2] Lash, J. (2016, June 6). National Security a Top Priority in Cross-Border Deals. Retrieved from
[3] Global and regional M&A: Q1-Q4 2016 (pp. 1-44, Rep.). (n.d.). Mergermarket. Retrieved from


Regulation of Cross-Border Investment Among Other Energy Industry Power Players

By Bryndon Kydd, BDO Canada, and Louise Sayers, BDO United Kingdom

The United Kingdom and Canada, both close partners of the U.S., have implemented, or are beginning to implement, similar provisions to CFIUS to help manage the risks associated with international investment in domestic companies.

United Kingdom

Similar to the U.S., the U.K. actively supports free markets and FDI, boasting one of the most competitive corporate tax systems in the G20, with an expected corporate tax rate of only 17 percent by 2020. Unlike the U.S., however, the U.K. does not currently discriminate between nationals and foreign individuals in the formation and operation of private companies, ordinarily. [1]

Nevertheless, this hands-off approach is soon changing, as ministers plan to impose a new legal framework that, like the CFIUS review, will scrutinize future FDI in Britain’s critical infrastructure for national security risks, including nuclear energy. [2] While the triggering of Article 50 and the implications of Brexit leave international trade arrangements for the U.K. uncertain, it can be expected that this new framework will be designed to protect British national interests from potentially risky foreign investments.


Foreign investment is a critical component of the Canadian economy, helping drive employment and, more broadly, economic growth. As such, the Canadian government offers various funding incentives to encourage foreign investment, such as the Invest Canada – Community Initiatives (ICCI) program, the Canadian International Innovation Program (CIIP) and the Going Global – Innovation (GGI) program for researchers. These programs seek to make Canadian communities more attractive to foreign investments and/or to facilitate collaborative research and development activities between Canadian companies and foreign partners.

Foreign investment and ownership in the Canadian natural resources sector in particular has seen a notable uptick in recent years. The government of British Columbia, for example, has been aggressively courting foreign oil and gas companies to build liquefied natural gas facilities on Canada’s west coast. In addition, Asian investment in Canadian mining projects are on the rise, with economic powerhouses like China and South Korea actively seeking investment opportunities in—and often, control of—mining projects in Canada as a means to secure mineral resources for their use. These efforts are often backed by quasi-government agencies, making them somewhat controversial among the Canadian public and media. The Canadian government, however, has generally not blocked this type of investment, aside from select cases involving quite large companies. As a result, the targets tend to be smaller producers.

The growing prominence of FDI in Canada has led to the implementation of the Investment Canada Act, the country’s counterpart to the U.S. CFIUS review process. The goals of the Act are largely the same as CFIUS: “to provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments … that could be injurious to national security.” [3] The law requires foreign investors to file a notification with the Canadian government within 30 days of the implementation of the investment. From there, the government has 45 days to review the investment, with the option to extend the review period by 30 days, and issue a decision as to whether the investment can proceed. In some cases, the review period may be extended further.

[1] Investment Climate Statements for 2016. (n.d.). Retrieved from
[2] Government confirms Hinkley Point C project following new agreement in principle with EDF. (2016, September 15). Retrieved from
[3] An Overview of the Investment Canada Act (n.d.). Retrieved from

BDO Spotlight: Q&A with Basil Karampelas

Managing Director in BDO Consulting’s Business Restructuring and Turnaround Services practice

Can you tell us about your background and experience prior to joining BDO, and what initially sparked your interest in the energy sector?
My interest in energy came early in my career. After graduating from Stanford University and the Stanford Graduate School of Business, I started my career as an investment banker in the energy sector. During that time, I learned about the industry in-depth and witnessed firsthand its continuously changing market dynamics. I then transitioned from banking to the corporate side of business and held many M&A leadership positions at various energy companies throughout the years. My interest in organizational strategy and business restructuring emerged in 2008, when I joined a hedge fund for energy portfolio companies. As an operating partner, I helped underperforming portfolio companies identify and implement the changes needed to continue successful operations. I then became the president of American Process Inc., a company in the renewable energy sector, in 2012. Eight months ago, I joined BDO’s Business Restructuring and Turnaround Services practice through a well-known colleague. My attraction to BDO stemmed from its broad capabilities and offerings, including its great platform and nimble, entrepreneurial environment.

I am drawn to the energy sector for three main reasons. The first is its constantly changing environment—because commodity prices are often volatile, the industry is never stagnant, with something new always coming across the horizon. The second reason has to do with its pioneering spirit. The risky nature of exploration and production (E&P) for oil and gas often attracts people who are very forward-thinking and entrepreneurial, with a lot of self-made success. The third reason is because it’s an industry with breadth and depth; there’s enough variety that even an industry specialist can work across a broad spectrum of sub-sectors. You always find yourself busy.

What general bankruptcy and restructuring trends are you seeing across the energy industry and its various subsectors?
There are two major trends sweeping across the industry. The first trend is the industry’s overall adaption to lower commodity prices—with around $50 to $60 per barrel now considered the new industry normal. Many companies are still accustomed to the triple-digit pricing from prior years, and are still figuring out how to adjust their business operations for a lower price environment.

A second major trend is the rotation in bankruptcies between sectors. While bankruptcies in the upstream sector remain prevalent, we’re also seeing an increase in bankruptcies in other sectors as well, including the power generation, maritime and oilfield services sectors.

There are many reasons for the latter bankruptcies. Within the power generation sector, lower power prices driven by low fuel prices, as well as significant power surplus in certain areas like California, are driving up the number of bankruptcies. The power surplus puts significant margin pressure on power generators, which consequently takes a toll on power companies. In the maritime industry, the significant increase in bankruptcies can be attributed to multiple factors, including a boom in fleet construction in the 2000s while the shale revolution and subsequent growth of the domestic energy industry undercut the need for the transport of crude to the U.S. Oilfield services companies have also found themselves in a precarious position, with the optimism from OPEC’s decision to cut oil production beginning to fade. Many have struggled to strike new contract deals with E&P companies, or have found their contracts to be renewed at lower prices than before.

What are the most common mistakes that companies make prior to declaring bankruptcy and/or undergoing restructuring?
The number one mistake companies make is waiting too long to file for bankruptcy. The longer a company waits to file, the bigger the hole it has to dig itself out of, and the more difficult position it finds itself in versus its creditors. Many companies believe that waiting until the last minute will minimize their expenses when they go through the process, but this is not necessarily true. The second biggest mistake companies make is not considering all the obligations they have other than debt, such as leases and price hedges. Failure to consider their obligations in totality can leave them financially vulnerable. Finally, many companies lack the management capability to undergo an entire bankruptcy process. Organizations that have been recently formed have management teams built for growth, but not for constraint—two different scenarios requiring two very different skill sets.

What considerations should companies keep in mind when determining the best filing or restructuring strategy?
When determining an appropriate filing strategy, companies need to develop questions in three key areas. First, companies need to ask whether they have the right people in the right roles to get them through this process. If they don’t, they need to figure out if they need to bring in more people internally or if they should rely on external advisors. Second, companies must ask what debt and equity will be available to them going forward, given their changing circumstances. The access to capital is key to determining the size and scope of their business plan moving forward. Finally, when thinking through future opportunities, companies must ask themselves how they will survive in the new environment post-restructuring, and what new opportunities they should pursue or curtail.

What are the biggest regulatory changes you anticipate for 2017, and how can firms prepare for these changes?
There are three main regulatory changes that we should expect this year. The first change involves the loosening of regulations on pipeline approvals and oil and gas drilling in new areas in the U.S.—both of which can lead to increased domestic supply. The second potential change involves changing the current tax regime by making domestic crude oil production tax advantaged. While the proposal has not yet been issued, a potential tax on crude imports will have significant ramifications across all heavily fuel-dependent industries.

The third major regulatory change is tied to renewable energy. Depending on the administration’s stance on the Renewable Fuel Standard (RFS) program, a federal program that requires a certain volume of renewable fuel to replace or reduce the quantity of petroleum-based transportation fuel, we can expect many renewable energy companies, particularly those in the biofuels industry, to be affected.

Energy companies should prepare for these changes by stress-testing their financials based on the above scenarios—including each scenario’s impact on their production profile, pricing profile and financial results.

PDAC 2017: Ever the Risky Business

By Bryndon Kydd

The mining sector has always been fraught with risk. The very nature of geology itself is both fascinating and uncertain. Combined with sometimes fickle and always cyclical markets, the sector has never been for the faint of heart. At this year’s PDAC Convention, I’ve seen a couple themes arise that seem to have been added to the mix for the coming year and beyond: advancements in technology and the geopolitical environment.

Advancements in technology

Technology and innovation are double-edged buzzwords often thrown around as we prepare for a cautious resurrection of the sector. The mining industry has long been characterized as slow to adopt new technology, with this trait having logical roots given long project lives with high initial capital costs. As the market recovers, many have adopted—and some bet the farm on—the mantra of innovative approaches to traditional methods, designed to build improved margins on a foundation of lower grades typically realized in today’s environment.

There are certainly opportunities in technology, with autonomous equipment and data analytics being the brightest points currently under consideration by many mining companies. These technologies have significant potential to reduce downtime and labor costs, while improving safety and allowing companies to burrow deeper, accessing resources previous deemed out of reach.

The risky side of innovation is on the type of resource itself. While the historical staples of gold and iron ore remain old faithfuls, uncertainty prevails on which minerals tomorrow’s markets will demand. For example, there’s much talk about lithium recently, given advancements in battery technology and the aforementioned demand for autonomous vehicle technology, which is expected to disrupt a variety of industries. However, with technology advancing at an ever accelerating rate, the longest period we can be sure there will be significant demand for lithium is 10 years, which is roughly the best case scenario for construction of a new mine from grassroots drilling through to production, not to mention an expected mine life of 25 years or longer.

There is an inherent disconnect between today’s rapidly evolving technological consumption and an industry that simply cannot move quickly due to the complex and uncertain nature of its resources. This may be a key impediment to the advancement of some new technologies, as the risks involved may be beyond the appetite of companies with the means to pursue development of mineral deposits containing the resources needed to mass produce certain new technologies.

Geopolitical environment

Geopolitical risk has quickly accelerated as a major uncertainty for many industries, and mining is not immune. In our post-Brexit world rocked by random and vague Tweets, mining companies are left wondering what the demand may be for their products and where they may be safe to develop long-term projects. Never before has so much conflicting, and often dubious, information played on the whims of those who influence demand for the products of the mining sector.

Lofty promises of major infrastructure spending have been made recently by more than one major Western nation as a means to jump-start economies. Should these plans move forward, they could provide a boost in demand for a variety of metals and minerals. However, many are skeptical of these promises coming to fruition given mixed opinions on this strategy’s effectiveness, especially given its recent failure when applied by Japan. This may cause decision makers to rescind these commitments.

Expanding division among socioeconomic classes in developed nations threatens the economic stability of some established nations, potentially passing global economic influence to developing nations with differing priorities than Western nations. Ironically, the technological advancements that the mining industry is cautiously embracing threaten to aggravate unemployment, as robotics and technological efficiencies replace traditionally manual processes.

While there was much positivity at this year’s PDAC, my observation is that decision making in the sector is only becoming harder, likely resulting in a slow recovery as companies move ahead cautiously. The majors may be hesitant to invest significant capital in the pursuit of non-traditional resources, potentially allowing opportunity for the juniors to capitalize on high-risk, high-reward opportunities.

Interested in reading more? Read Bryndon’s observations from PDAC 2016 here.

This article originally appeared on

Bryndon Kydd is partner and leader of BDO Canada’s Natural Resources practice and can be reached at [email protected].

PErspective in Natural Resources

Rigged up and ready to go, M&A activity in the energy space is already soaring to new heights in 2017, Dealogic data shows.

Global oil and gas companies completed 98 deals and raised $63.3 billion as of mid-February—the largest level of M&A ever recorded for this time frame. The staggering total comprises $53.6 billion worth of U.S. deals, blowing the $11.8 billion total during this period in 2016 out of the water.

While oil and gas executives expected a steady cadence of M&A this year, the record-shattering transaction total far exceeds predictions. BDO’s 2017 Energy Outlook found that two-thirds of energy CFOs expect M&A activity to increase in 2017, dropping from 75 percent the year prior.

Investors are flocking to the Permian Basin to pursue deals.” Several of this year’s flagship deals took place in the Permian Basin. ExxonMobil announced a $6.6 billion deal to acquire Bass family companies, with holdings of 250,000 net acres in the Permian Basin and an estimated 3.4 billion barrels of oil. In another multibillion-dollar deal, Noble Energy announced plans to acquire Clayton Williams Energy for $2.7 billion. In keeping with the pace of investments in the region, the active rig count in the Permian Basin totaled 308 in March 2017, a dramatic resurgence from 134 in May 2016, according to Baker Hughes.

Private equity firms also kicked off 2017 with a bang in both the lending and fundraising spaces. Actis Capital’s fourth energy fund closed in March and was oversubscribed at $2.75 billion, surpassing its $2 billion target by an impressive margin. Actis Energy 4 has funds allocated for renewable energy investments in India and will also invest in Latin America, Africa and Asia. On the lending front, Houston-based Post Oak Energy Capital LP committed $200 million of equity to Moriah Henry Partners LLC, after closing on a $600 million oil and gas fund in May 2016.

This ramp up in PE interest in the sector likely comes as little surprise to oil and gas executives. Fifty-four percent of energy CFOs expect PE to be the primary source of capital backing transactions in 2017, according to BDO’s survey. Other sources of anticipated capital for M&A include debt financing (20 percent), IPOs (14 percent) and Master Limited Partnerships (10 percent).

Mirroring energy CFOs’ predictions for the year ahead, PE firms display a growing sense of confidence in the sector. Energy ranked fourth among the sectors with the most opportunity for new investment in BDO’s Eighth Annual PErspective Study, closely trailing manufacturing, technology and healthcare. Forty-four percent of fund managers expect natural resources will see increasing valuations in 2017, up from 36 percent the year prior.

The upward movement of oil prices in the fourth quarter of 2016 sparked PE divestitures as well. After holding on to energy assets in their portfolios throughout the downturn, some PE firms took the opportunity to exit while oil prices were on the upswing. According to data from KeyBanc Capital Markets, PE sold energy assets worth a total of $26 billion in 2016, with much of that activity concentrated in Q4.

The exit environment continues to be relatively favorable for PE in 2017. Three private equity-backed energy companies went public in the first quarter: Jagged Peak Energy, Keane Group and Ramaco Resources. First out of the gate, Jagged Peak Energy—backed by PE firm Quantum Energy—raised $474 million in a January IPO, falling short of its $650 million target. Keane Group and Ramaco Resources both surpassed their initial targets, raising $508.4 million and $81 million respectively.

Overall, a total of four energy companies went public in the first quarter, accounting for 25 percent of all IPOs within that time frame, IPO Boutique reports. The outlier of the energy IPO tetrad, Kimbell Royalty Partners LP, a master limited partnership, raised $90 million in its February debut.

Future PErspectives: What’s Next for Natural Resources Investors?

The momentum for PE-backed energy company IPOs is expected to continue. 

The global IPO to watch is the much-anticipated offering of Saudi Arabia’s national oil company Saudi Aramco, currently valued at as much as $2 trillion, Financial Times reports. London and New York are vying for the opportunity to host the IPO, set to open in 2018. While the Aramco IPO stands out as the trillion-dollar exception for energy filings, rather than the rule, the global oil and gas community is sure to closely monitor the developing offering.

Did you know...

Fifty-three percent of energy CFOs believe shedding distressed assets will be the primary driver of M&A activity in 2017, according to BDO’s 2017 Energy Outlook.

Oilfield services company Baker Hughes Incorporated found that the U.S. rig count was 809 in late-March, an increase of 288 rigs from the year prior.

As of mid-February, 2017 has seen the highest level of global oil & gas M&A ever recorded in this time frame’s history, with 98 completed deals totaling $63.3 billion, per Dealogic data.

The U.S. Energy Information Administration forecasts that net oil production from seven major oil and natural gas basins will increase by 109,000 barrels a day this April.

In January, Texas’ upstream oil and gas industry employed an estimated average of 206,100 workers, about 32 percent fewer than the number employed in December 2014, according to the Texas Workforce Commission.

For more information on BDO USA's service offerings to this industry, please contact one of the following practice leaders:

Charles Dewhurst


Jim Johnson

Kevin Hubbard

  Rafael Ortiz


Richard Bogatto 

  Clark Sackschewsky



Tom Elder 


Chris Smith
Los Angeles


Vicky Gregorcyk 


Alan Stevens 


Rocky Horvath


Jim Willis