Record incomes, record prices . . . Practically everybody in oil and gas made money last year, but it’s clear that cheap energy is a thing of the past.
A recent Grant Thornton survey reveals that industry veterans are increasingly finding themselves, in many cases for the first time, scrapping for qualified technical people and affordable drilling equipment and services. They are also feeling an urgent and mounting pressure to replace depleting reserves.
The2006 Grant Thornton Survey of US Independent Oil and Gas Companies is the fourth in a series. This year’s survey was conducted in December 2005 through mid-January 2006, with responses from senior executives of more than 75 independent oil and gas companies. Survey topics included price and employment forecasts, areas of greatest investment potential, spending plans, and other important industry issues.
With major and ongoing international unrest, the industry impact of hurricanes Katrina and Rita, and a national energy bill that focuses more on alternative energy sources rather than the hoped-for new drilling tax incentives, the time is particularly auspicious for checking in with industry executives to learn what they’re thinking about, what they’re working on, and what keeps them up at night.
Although our survey findings will not shock industry insiders, they do reveal at least three major trends, including strains to keep up with (1) hiring, (2) drilling demands, and (3) a high level of consensus with respect to increases in capital spending.
Surprisingly, we found respondents much more cautious about prices than they were last year.
Struggling with staffing: This is the first time in the four-year history of our survey that independent E&P companies were more concerned with issues like human resources than they were with price expectations:
•95% of respondents expect higher employment levels at their companies in 2006 (compared with 70% in 2005 and 62% in 2004);
• 84% expect significant increases in compensation for technical staff (compared with 63% in 2005 and only 35% in 2004); and
• 65% anticipate difficulties hiring and retaining employees (up from 20% two years ago).
Drilling demands:Rigs and labor are worrying most respondents:
• 88% report difficulties during the past year with obtaining drilling services (compared with 70% in our 2005 survey);
•79% anticipate more difficulty securing contract drilling services in 2006.
Capital spending increases: Most respondents plan to increase capital spending, but respondents have a much different outlook on future price levels than that suggested by another official industry source (i.e., Energy Information Administration or EIA):
• 89% of respondents anticipate an increase in domestic capital expenditures in 2006; and
•89% expect a need for more capital (compared with 83% in 2005).
Not surprisingly, survey respondents reveal that they believe prices are not going to remain at their current high levels, and, in fact, believe that prices will decrease.
What is surprising is the extent to which our respondents disagree with EIA statistics. For 2006 and 2007, respectively, EIA sees oil prices for West Texas Intermediate crude at roughly $10 and $9 higher than respondents.
This disparity in outlook suggests that respondents are not going to be aggressive; it suggests that they’re going to sit tight, and wait to see what the market’s going to do. Further, they’re going to remain in this cautious mode for some period of time. The majority of respondents are veterans of the industry who understand the cyclical nature of prices. The degree of caution is what’s new this year.
Caution, however, is met with the industry’s traditional tenacity and leadership. Most respondents are looking to grow operations based on successful exploration of existing projects, followed by successful exploitation, and mergers and acquisitions. They also believe that the Gulf of Mexico still holds the greatest potential for oil and natural gas discoveries, followed by the Rocky Mountains and Canada.
Although no longer in the secure days of daily price highs, the oil and gas industry continues to be fascinating. New challenges and complexities are equally balanced by the endless capacity of veterans in this business to innovate, to explore, and to embrace the changing nature of this dynamic and vital industry.
Donald L. Weeks is the assurance practice leader and heads the energy practice for the Dallas office of Grant Thornton LLP ([email protected]).
Reed G. Wood is the partner-in-charge of the oil & gas industry program for Grant Thornton LLP and is based in the Houston office ([email protected]).
Copies of the full survey report can be obtained online at www.GrantThornton.com/oilandgas.
