Regulatory Uncertainties, Economic Woes Plague U.S. Energy Companies, BDO Study

August 2017

Krystal Le
Bliss Integrated Communication
(212) 600-2584


New U.S. Administration, Operational Risks and Fierce Competition Top Company Concerns

Chicago, IL –- Big Energy is feeling optimistic—but cautiously so. With more than half of 2017 over, oil & gas companies are tempering a hopeful outlook with practical realism as they continue to navigate complex economic and political developments at home and abroad. According to BDO’s 2017 Oil & Gas RiskFactor Report, a regulatory environment in flux, volatile commodity prices and fluctuating global economic conditions top the list of industry concerns in 2017.
In the wake of the global downturn, oil & gas companies’ economic woes persist: Of the top 100 publicly traded exploration & production (E&P) companies, as ranked in the 2016 Oil & Gas Journal 150 (OGJ150) index, all 100 cite the price volatility of oil, gas and other energy commodities as a top risk in their annual 10-K filings for the fifth time in seven years. Ninety-five percent cite limited access to capital as a risk, and 81 percent fear increasing operating costs, up from 59 percent in 2016. Additionally, the threat of bankruptcy has skyrocketed 10 percentage points from last year—from 19 percent in 2016 to 29 percent in 2017.
Meanwhile, regulatory uncertainty introduced by the Trump administration has led 41 percent of the largest oil & gas companies to mention risks related to the new administration in their 10-K filings. Political instability in the Middle East and elsewhere has made international risks top of mind as well, with 45 percent of companies specifically worried 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).
“Political turmoil and international tensions continue to be top of mind for many energy companies, especially when considering many of the recent geopolitical developments,” says Charles Dewhurst, international liaison partner and leader of BDO’s Global Natural Resources practice. “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.”
These findings are from the seventh annual BDO Oil & 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. oil & gas companies, as ranked in the 2016 OGJ150 index. 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 publicly traded U.S. oil & gas companies:

Top Risks for Oil & Gas Companies
2017 2016 2015 2014 2013
Fluctuations in the price/volatility of oil/gas/energy commodities #1t 100% #1t 100% #3 99% #1t 100% #1t 100%
Political/regulatory/legislative developments #1t 100% #1t 100% #1t 100% #1t 100% #1 100%
Disruptions due to natural disasters, unexpected weather conditions, etc. #1t 100% #4 97% #4t 96% #6 96% #3t 96%
Environmental and/or health requirements/restrictions/regulations #4 99% #5t 96% #7 95% #3t 98% #3t 96%
General national/global economic conditions #4t 99% #9 89% #11 88% #9 90% #8 92%
Changes in level of demand #6t 98% #13t 84% #10 89% #8 92% #9t 91%
Supply risks #6t 98% #1t 100% #1t 100% #3t 98% #3t 96%
Inaccurate reserve estimates #8 97% #8 93% #9 91% #10 89% #7 93%
Operational and E&P risks #9 96% #5 96% #4 96% #3t 98% #6 95%
Limited access to capital/indebtedness #10t 95% #5t 96% #8 93% #7 95% #9t 91%
General competition #10t 95% #10 87% #12t 87% #13t 84% #11 90%
Inability to properly recover/develop undeveloped or proved reserves #12t 93% #27t 69% #31 69% #17 81% #29 61%
Insurance: self, credit, cost, potential losses due to uninsured liabilities #12t 93% #16t 83% #12t 87% #13t 84% #15 86%
Impact of climate change/greenhouse gas legislation #14 91% #11t 85% #17t 82% #18 80% #12 89%
Competition from or price/availability of alternative energy sources #15t 89% #20 79% #15t 83% #20 79% #21 76%
Insufficient refining/pipeline/storage/trucking capacity #15t 89% #22t 74% #20 80% #13t 84% #18t 80%
Changes to federal tax policy #15t 89% #26 70% #33 67% #25t 68% #28 63%
Interruptions/threats to production from terrorist activities/political instability #18t 85% #11t 85% #15t 83% #23 74% #17 82%
Reliance upon third party-owned processing facilities/transportation #18t 85% #21 77% #21 77% #22 77% #18 80%
Liabilities/costs for pollution resulting from current or previous operations #18t 85% #16t 83% #26 72% #16 83% #14 87%
*t indicates a tie in the risk factor ranking
Additional findings from the 2017 BDO Oil & Gas RiskFactor Report include:
Talk of Tax Reform Spurs Anxiety
With tax reform on the table—and the White House’s initial proposed tax framework announced—anxiety is high for what changes to the current federal tax policy may mean for businesses in the year ahead. In fact, 89 percent of oil & gas companies cite changes to federal tax policy as a risk—a significant jump from 70 percent in 2016 and the highest in this study’s history.
“For an industry that has used federal tax laws and regulations to help spur growth and investment, the possibility of a tax reform that may change or eliminate some of these long-standing regulations constitutes a very real fear,” said Clark Sackschewsky, tax managing principal in BDO USA’s Houston office. “However, the bigger concern is the uncertainty around what tax reform will look like—and whether significant changes to tax policy will pass in the first place—which makes planning for future investments a challenging balance of foresight and caution.”
The Pressure to Be Environmentally Friendly
Since the first year of this study in 2011, environmental regulation has consistently been cited by more than 90 percent of oil & gas companies.
  • This year marks the highest percentage of oil & gas companies reporting concerns related to the environment at 99 percent.
  • 91 percent specifically worry about the impact of climate change and greenhouse gas (GHG) legislation on their operations, up from 85 percent in 2016 and 82 percent in 2015.
  • More than a third (35 percent) specifically cite Obama-era clean energy initiatives as a risk.
For Oil & Gas, The Future Looks Digital
While new technology carries the potential to streamline, expedite and enhance operations, the oil & gas industry is likely to experience growing pains as changes take hold.
  • More than two-thirds (69 percent) report technological advances affecting energy production, consumption and supply as a risk, up from 60 percent last year.
  • 73 percent worry about cybersecurity, up dramatically from 12 percent in 2012.
Becoming a Petroleum Powerhouse
The downturn may be over, but volatility, at least for the foreseeable future, is here to stay. In an environment where higher prices don’t have staying power and political pressure to rebalance the market remains, oil & gas companies face fierce competition for finite demand.
  • The industry sees 2017 as its most competitive year since 2011: 95 percent cite competition as a top risk factor in their 10-Ks, up from 87 percent the previous year.
  • 89% are concerned about competition from alternative energy sources.
  • 66% worry about competition from foreign rivals.
  • 33% cite energy efficiency initiatives as a top risk factor.
“Most of the industry believes, as do we, that oil & gas will continue to be a vital part of the global energy mix for years to come,” said Tom Elder, partner and leader of BDO’s U.S. Natural Resources practice. “But that doesn’t mean companies can afford to ignore the global transition to clean energy and its economic repercussions. The future of energy is inevitably greener than it is today. The savviest oil & gas producers are ahead of this trend and focused on diversifying their revenue streams.”
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 order of frequency cited.
For additional insights, view the full report here.

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