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

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:

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.

About BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services
firm providing assurance, tax, 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.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S.
member of BDO International Limited, a UK company limited by guarantee,
and forms part of the international BDO network of independent member
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