Natural Resources Industry Continues Growth, But Competitive Challenges Loom: BDO USA Analysis

May 2014

Meghan Warren
Bliss Integrated Communication


CHICAGO - The U.S. oil and gas industry continues to thrive on the heels of a steadily improving economy, stable prices and the ongoing profitability of shale formations scattered throughout the United States. This year’s BDO Oil and Gas RiskFactor Report, which analyzes the risk factors listed in the most recent 10-K filings of the 100 largest public E&P companies, found that the top 20 industry risks continue to hold steady, with few new concerns bubbling up. The consistency of the two leading risks—regulatory changes and commodity price volatility—over the past four years suggests that companies remain primarily concerned about interruptions to the industry’s ongoing growth.

However, two risks are emerging as growing threats to the booming industry: demand for qualified leadership and the ability to recover undeveloped reserves. This year, 80 percent of companies cite the ability to attract and retain key personnel as a top risk, up nearly 10 percent from 2013. As the sector continues to grow, the number of operational entities has proliferated, with the U.S. Bureau of Labor Statistics indicating that the number of active E&P companies increased by about 27 percent between 2003 and 2012. As a result of this growth, competition to attract a selective group of highly-qualified executives has intensified. Meanwhile, 81 percent of companies also express increasing apprehension that they may be unable to recover their undeveloped reserves economically or before their leases expire. This marks a one-third increase since 2013.

"The non-conventional oil and gas industry is a highly competitive space, with new wells coming online and more companies entering the game all the time," says Charles Dewhurst, leader of the Natural Resources practice at BDO. "As the industry continues its upward trajectory, we may expect to see a growing number of companies vying for a relatively static and selective pool of prospects, leadership and labor."

These findings are from the fourth annual BDO Oil and Gas RiskFactor Report, which examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest (by revenue) publicly-traded U.S. E&P companies. The risk factors were analyzed and ranked in order of frequency cited.

The following is a list of the top 20 risk factors cited by the 100 largest U.S. E&P companies:


2014 Rank   Risk Factor Cited in 10-K Filing 2014 2013 2012 2011
1. Regulatory and legislative changes and increased cost of
100% 100% 100% 100%
1t. Volatile oil and gas prices 100% 100% 99% 100%
3. Inability to expand reserves or find replacement reserves 98% 96% 98% 98%
3t. Environmental and/or health regulations 98% 96% 94% 94%
3t. Operational hazards including blowouts, spills and personal injury 98% 95% 98% 97%
6. Natural disasters and extreme weather conditions 96% 96% 95% 96%
7. Inadequate liquidity or access to capital, indebtedness 95% 91% 94% 95%
8. Changes in demand for oil or natural gas 92% 91% 87% 76%
9. General national or global economic conditions 90% 92% 94% 91%
10. Inaccurate reserve estimates 89% 93% 95% 96%
11. Hydraulic fracturing regulation 85% 85% 74% 52%
11t. Use of hedging or derivative instruments 85% 77% 48% N/A
13. General industry competition 84% 90% 89% 87%
13t. Inadequate or unavailable insurance coverage 84% 86% 88% 87%
13t. Insufficient pipeline, storage or trucking capacity 84% 80% 63% 29%
16. Liabilities for pollution resulting from current or previous operations 83% 87% 79% 59%
17. Ability to properly recover undeveloped reserves 81% 61% 26% N/A
18. Impact of climate change and greenhouse gas regulation 80% 89% 81% 69%
18t. Ability to attract and retain key personnel 80% 73% 79% 78%
20. Price of and competition from alternative fuels 79% 76% 78% 72%
*t indicates a tie in the risk factor ranking

Growing regulation persists as number one risk. Federal, state and international regulations remain the most frequently cited risk in companies’ 10-Ks this year, an ongoing trend since the study’s inception. All companies analyzed list regulation as a risk, and this year, there was a slight uptick (2 percent) in the number of companies mentioning health and environmental regulation. While fewer organizations note climate change and greenhouse gas regulations as a risk, the recent Supreme Court ruling empowering the Environmental Protection Agency to take stronger action on carbon emissions may ultimately have unanticipated reverberations from upstream to downstream.

Hedging transactions grow riskier. A majority (85 percent) of companies cite risks associated with their use of hedging arrangements to offset commodity price fluctuations. While oil prices have seen relative stability in recent years, domestic natural gas prices remain persistently low. Many oil and gas companies entering into hedging agreements in the current pricing environment could lose out on potential profits should prices increase. Many also express concern that counterparties to these derivatives transactions may default—a risk specifically noted by 65 percent of companies.

Hydraulic fracturing poses unique challenges. Hydraulic fracturing, or fracking, and related technology have been the cornerstone of the United States’ energy boom. However, it is still a relatively new technology, and the regulatory environment surrounding its use continues to evolve. Of the companies referencing operational risks in their 10-Ks, nearly one-in-four specifically cites the use of fracking and horizontal drilling technology as a concern. Meanwhile, 85 percent of companies say regulation associated with fracking is a risk this year, consistent with 2013 and nearly double the proportion citing it in BDO’s inaugural Oil and Gas RiskFactor Report in 2011. Nevertheless, the lack of significant increase this year suggests that companies are more prepared for regulation and are seeking to cooperate with both the government and public to manage fracking’s potential impact on communities, the land and the environment.

About the Natural Resources Industry Practice at BDO USA, LLP

BDO’s Natural Resources industry practice provides assurance, tax and advisory services to emerging and established businesses in the United States and all over the world that are involved in both the traditional and alternative energy industries. Our clients often operate across borders, either raising capital or making acquisitions abroad. Our extensive industry knowledge is supported by our global network of 1,264 offices in 144 countries, allowing us to provide a consistently high level of service wherever our clients do business.

About BDO

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