Energy CFOs Anticipate Blazing Deal Pace in 2015, According to BDO Study

January 2015

Meghan Warren
Bliss Integrated Communication
212.584.5469
Meghan@BlissIntegrated.com

Chicago – As 2014 came to a close, U.S. energy executives were on edge as oil prices remained stubbornly low. However, despite these fluctuations, energy chief financial officers expect a robust year ahead for mergers and acquisitions.

According to BDO USA, LLP’s annual survey of 100 U.S. oil & gas CFOs, more than half (56 percent) of CFOs project growth in M&A activity in 2015, a 30 percent increase over the number expressing similar sentiments last year. CFOs believe revenue and profitability and reserve replacement enhancement will catalyze deal flow this year, with 27 percent of respondents citing each as the main driver of activity. And while cost reduction programs remain energy companies’ favored method for improving value for stakeholders, one-fifth of respondents say they will pursue a merger or acquisition to increase stakeholder ROI.

The projected growth in deal flow is good news for the private equity industry, as well. This year, half of the CFOs surveyed indicate that they plan to secure outside capital from private equity funds, a 25 percent increase since 2014.

“The industry might be anxious in the near-term about price volatility, but their optimism toward deal flow suggests that the long-term outlook is bright,” says Charles Dewhurst, partner and leader of the Natural Resources practice at BDO. “The recent oil price drop is but a blip on the radar in the bigger picture. Natural gas remains strong and private equity is hungry for smart natural resources investments, all of which point to a strong future for the sector.”

These findings are from the BDO 2015 Energy Outlook Survey, which examines the opinions of 100 chief financial officers at U.S. oil & gas exploration and production companies. The nationwide survey was conducted from September through November 2014.

Additional findings from the BDO 2015 Energy Outlook Survey include:

CFOs are confident in their access to capital. This year, an overwhelming majority of survey respondents—80 percent—say that they feel better about their access to capital and credit than last year. The number of CFOs citing decreased access to capital as the top factor inhibiting growth decreased by half to 3 percent, and only 9 percent of respondents say that their ability to secure funding will be a leading financial challenge in 2015. This suggests that investors and creditors remain willing to open their coffers for well-planned, promising oil & gas projects in the coming year—and that they see more industry growth on the horizon.

Industry walks a razor’s edge with labor force. As we found in our 2014 Oil & Gas RiskFactor Report, U.S. oil & gas companies are concerned about retaining skilled workers. This year, a majority (53 percent) of CFOs say that they anticipate that labor costs will increase; however, only 35 percent say that headcounts will increase in tandem.

“Energy companies have been taking extraordinary measures to attract and keep a highly-qualified pool of technical and professional workers,” says Lance Froelich, senior director of compensation consulting in the Global Employer Services group and a member of BDO’s Natural Resources practice. “Powerful competitive forces both within the sector and other industries, such as tech, have forced their hand toward more generous compensation and benefits packages in recent years. It will be interesting to see, however, if recently-depressed oil prices will alter this calculus.”

At the executive level, compensation appears steadier. Sixty percent of CFOs believe employee bonuses for fiscal year 2014 will be consistent with fiscal year 2013 levels, and about half of CFOs believe their own compensation will not change in 2015.

Companies continue to focus investment in shale. When asked about their investment plans for 2015, CFOs indicate that shale will continue to be a priority in the coming year: Forty-seven percent of CFOs plan to increase their investment in non-conventional plays. And amid growing concerns about the environmental impact of shale extraction methods, 35 percent of respondents say they will also grow their investment in environmentally-friendly exploration and processing technologies. Meanwhile, offshore exploration continues to struggle nearly a half-decade after the Deepwater Horizon disaster, with only 6 percent of CFOs citing offshore drilling an area of investment.

The BDO 2015 Energy Outlook Survey is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to CFOs at a sample of oil & gas exploration and production firms (with revenues ranging between $76,000 and $323 million and an average revenue of $26.7 million) from September through November 2014.

About BDO USA

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 151 countries.

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