Top U.S. Energy Companies Falter Under Weight of Depressed Prices, Threat of Bankruptcy – BDO Report

May 2016

Michaela Morales
Bliss Integrated Communication
212.600.2586
michaela@blissintegrated.com

Supply Risks, Regulatory Challenges and Cybersecurity Round Out Company Concerns

CHICAGO –– May 24, 2016 –– With the U.S. energy industry experiencing its longest downturn in recent years, energy companies are looking at an unpredictable future. According to BDO USA, LLP’s 2016 Oil and Gas RiskFactor Report, volatile commodity prices once again top the list of company concerns in 2016.
 
This year’s analysis highlights how devastating the oil price rout has been: Of the top 100 E&P companies as ranked in the September 2015 OGJ150 index, about 10 percent have declared bankruptcy, been acquired, or were delisted from U.S. stock exchanges. Additionally, the threat of bankruptcy has more than doubled in risk factor reporting—from 8 percent in 2015 to 19 percent in 2016, a six-year high.
 
“When oil prices first began to decline in mid-2014, many energy industry observers hoped that the slump would follow the pattern of the 2008 contraction which, though painful, was brief. But we’re now well beyond that possibility, and the time has come for the sector to remove its rose-colored glasses,” says Charles Dewhurst, partner and leader of BDO’s Natural Resources practice. “This downturn will stay with us for a while, but it presents a unique opportunity for savvy oil and gas businesses to streamline operations and position themselves for success further down the line.”
 
These findings are from the sixth 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 assets) 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: 
 
2016 Rank Risk Factor Cited in
10-K Filing
2016 2015 2014 2013 2012
#1t Fluctuations in the price/volatility of oil/gas/energy commodities 100% 99% 100% 100% 99%
#1t Supply risks 100% 100% 98% 96% 98%
#1t Political/regulatory/legislative developments 100% 100% 100% 100% 100%
#4 Disruptions due to natural disasters, unexpected weather conditions, etc. 97% 96% 96% 96% 95%
#5t Operational and E&P risks 96% 96% 98% 95% 98%
#5t Environmental and/or health requirements/restrictions/regulations 96% 95% 98% 96% 94%
#5t Limited access to capital/indebtedness 96% 93% 95% 91% 94%
#8 Inaccurate reserve estimates 93% 91% 89% 93% 95%
#9 General national/global economic conditions 89% 88% 90% 92% 94%
#10 General Competition 87% 87% 84% 90% 89%
#11t Interruptions/threats to production from terrorist activities; civil unrest; political instability 85% 83% 74% 82% 72%
#11t Impact of climate change/greenhouse gas legislation 85% 82% 80% 89% 81%
#13t Hydraulic fracturing regulation 84% 96% 85% 85% 74%
#13t Changes in/level of demand 84% 89% 92% 91% 87%
#13t Maintaining adequacy/effectiveness of internal controls, financial reporting and accounting standards 84% 84% 57% 55% 87%
#16t Insurance: self, credit, cost, potential losses due to uninsured liabilities 83% 87% 84% 86% 88%
#16t Liabilities/costs for pollution resulting from current or previous operations 83% 72% 83% 87% 79%
#18 Shortage of rigs/equipment/personnel 81% 82% 78% 88% 81%
#19 Use of hedging/derivative instruments expose company to financial risks 80% 82% 85% 77% 48%
#20 Competition from; price and availability of alternative energy sources 79% 83% 79% 76% 78%
*t indicates a tie in the risk factor ranking

Further findings from the 2016 BDO Oil and Gas RiskFactor Report include:
 
A wave of financial challenges abounds for producers. A lack of access to capital or credit, while always a risk, is cited by 96 percent of companies this year, the highest proportion in six years.  And though increases in the cost of operating have declined as a risk, down to 59 percent of companies from 70 percent in 2015, it is clear that these lower costs are not enough to offset the concurrent decline in revenues caused by the price slump. Financial challenges have also affected companies’ exposure to accounting-related risks. As prices dropped throughout 2015, many companies were forced to write down the carrying value of a number of their properties, leading 84 percent of companies analyzed to specifically note risks associated with financial reporting, accounting methods and impairment this year.
 
Business interruption risks prevail. Concerns surrounding natural disasters (cited by 97 percent of companies) and geopolitics and terrorism (cited by 85 percent of companies) continue to settle near the top of the RiskFactor rankings this year. A significant, and fairly new, area of worry is the threat posed by cyberattacks: risks associated with data breaches have grown from just 12 percent in 2012 to 74 percent this year, with cybersecurity proving to be a rapidly moving target as bad actors evolve and seek to leverage increasingly sophisticated hacking methods.
 
Regulation and potential tax changes remain top of mind. Regulatory concerns persist as a major risk, cited by all companies in the study for the sixth consecutive year. The industry has consistently found itself in the crosshairs of political, legislative and regulatory scrutiny from all levels of government, and with the 2016 election looming, the energy sector is working to anticipate and proactively prepare for further changes. Companies also remain concerned about changes to tax policies, with 70 percent noting this as a risk. Most recently, significant uncertainty has surrounded the Obama administration’s proposal to levy a $10.25 tax per barrel of oil. Of the companies who mention tax changes broadly in their 10-Ks, one-third specifically cite this new proposal as a growing concern.
 
“Even in flush years, the oil and gas industry needed to remain vigilant about potential changes to their tax liabilities,” says Clark Sackschewsky, tax principal in BDO’s Natural Resources practice. “But with prices as low as they are, the prospect of an additional tax—which, at this point, would substantially raise U.S. producers’ break-even price—could prove highly destabilizing as the sector looks to get back on its feet.”
 
For more information on the 2016 BDO Oil and Gas RiskFactor Report, view the full report here.
 
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 who 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 international network of 1,328 offices in 151 countries, allowing us to provide a consistently high level of service wherever our clients do business.
 
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 63 offices and more than 450 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.
 
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