The E&P industry enters 2019 much as it entered 2018—planning to focus on a few core areas and to spend money wisely. At the same time, the economics of the sector continue to show improvement, with industry insiders saying they are able to keep production levels flat while maintaining current activity and re-establishing their strong cash flow positions.

Interest in A&D has increased slightly since 2017, but still with vigilance. Differing buyer/seller expectations remain a main concern. While 2017 saw more actual transactions, 2018 has seen larger transactions.

Overall, the value of technology to run the business and of data analytics to gain insights seems to be well established. Yet basin analytics and tech service and supply information remain key items that industry insiders have trouble obtaining.

These were some key findings from the fall 2018 Grant Thornton/Hart Energy Survey, where responses reflected a desire for steady growth amid relative optimism around the economy, but also exhibited continued caution. One respondent seemingly summed it up by saying it would “continue internal growth, expanding by purchasing existing infrastructure where similarities would be beneficial to business growth and continuity.”

Kevin Schroeder, national managing partner for the energy industry at Grant Thornton, said, “We are seeing a trend of consolidation, especially by larger companies looking to increase holdings and focus on core basins, such as the Permian Basin, while also seeing the industry rapidly respond to infrastructure challenges that have put production growth at risk.”

Strong and steady

Similar to the fall 2017 findings, producers are shoring up areas they know best. When asked “Which strategy fits your company within the next one to three years?” the top response was to pull back to a few core areas and sharpen focus on those.

In terms of prioritizing capex, 53% said they would stick to core-area drilling and development, while 50% want to focus on capex more efficiently. This is the second year that 50% or more of respondents said they’d prioritize spending in this way, and it shows a continued determination to operate with discipline to maintain regular growth.

“Coming out of this latest downturn, companies largely continue to show diligence and focus in their core areas,” Schroeder said. “It’s not necessarily about reserve replacement and production increases as key performance indicators of the past. We see companies operating with focus on efficiency, return and profitability improvement.”

Similar to 2017, 47% of respondents said they are using incremental improvements throughout the value chain to reduce costs or increase margins.

A&D

Interest in A&D showed a dip from 2017, with 40% of respondents indicating this past fall that they plan to look into transactions, down from 49% in 2017. Prudence prevails: One respondent noted it was looking for “high-quality opportunities that currently produce profitable cash flow with no further capex requirement.” Another is looking for growth “most significantly based on a business ‘fit’ model.”

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A decision to sell or merge was named as the organizational strategy deemed most important today. At the same time, one respondent named “complex financing and ownership of potential deals” as an obstacle to deal making. Concerns about access to capital around A&D were down from 2017, possibly reflecting a more robust economy.

“Private-equity funds are selling acreage they bought earlier. Assets that went into bankruptcy previously are now producing, and the outlook is stable,” said Kyle Reid, managing director of transaction advisory services at Grant Thornton. “Investors are quick to monetize past investments.”

Those who plan A&D activity this year expressed main concerns around commodity-price fluctuations and differing buyer/seller expectations. The bid/ask spread came up in the 2017 survey as well, so this may mark a continued disconnect between buyer/seller.

“Meeting buyer and seller expectations” was cited by one respondent as a key obstacle, while another said it was “difficult to find properties at a fair price.”

This news could reflect an improved market and more buoyant economy in which it’s harder to find distressed assets to buy and producers feel less pressure to sell.

“The speed in which new production is coming online indicates demand and surplus can quickly be achieved. With the cost of production hovering just above $40 per barrel (bbl) in areas, the outlook of oil prices ranging from $55/bbl to $75/bbl should satisfy investors,” Reid said.

Related to this, when survey participants were asked if they consider buyer/seller pricing to be stabilizing, 52% of respondents said “no,” up slightly from 48% who said “no” in 2017. This may mark continued uncertainty even as the economy has moved forward.

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International spend

Most companies, at 90%, indicated they do not plan to increase foreign spending—a jump from 2017 when 69% indicated they did not plan to expand spending outside the U.S. Of those in 2017 that did plan to expand, 21% said they would expand into Canada—which remains the biggest draw this year, but at a marked drop to only 4%.

The choice of Canada is not surprising, given its political stability and geographic location. In addition, Schroeder said, “production costs offshore remain higher as compared with the shale and [other] onshore opportunities in the U.S. Companies and investors are certainly eyeing offshore exploration and development opportunities, but at this point the U.S. onshore continues to prevail.”

Technology

As for technology, when asked what big data and data analytics they found most relevant, 48% cited technology data—specifically reservoir, fracking and completions. Others cited transactions data and production-forecasting data.

One respondent indicated data has been important since he got into the E&P business in 1974: “Only the tools to use for analysis have changed, with computing hardware and software technology capability.” Applying artificial intelligence (AI) in a timely manner and competitor performance metrics were cited as very relevant to running a smart operation.

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At the same time, respondents indicated they have difficulty with obtaining technology service and supply advice, and also play and basin analytics.

The biggest technology-infrastructure challenges cited were the cost of implementing a new tech platform and integrating systems to ensure compatibility.

Cybersecurity dropped in importance as a major tech issue from the 2017 survey—and it wasn’t a high priority in 2017 either—with only 7% citing cyber issues and vulnerabilities as a big risk.

“Many in the industry may be complacent about cyber threats,” Schroeder said. “But I believe we’ll see this view change in the near term during what I expect to be a period of rapid increase in the use of and reliance on technology and third-party applications and vendors.

“We shouldn’t wait for an event to happen to get our attention.”

The findings around data and technology indicate the industry is well aware that it’s valuable, yet it may still have trouble translating information into action through the steady use of data around operations, unexpected situations that might arise and a deep view that allows more informed decisions.

Risky business

Regulatory hurdles and delays were named key risks, followed by the ability to close on A&D. Safety and environmental issues were cited as a key risk by 24% of respondents.

“This number could be higher,” said Michael Osina, a partner in tax services at Grant Thornton. “More focus on environmental stewardship could broaden the public’s view of the industry and attract younger people, particularly millennials.”

The finding that regulatory hurdles are a major risk was interesting because in answer to the question of “How concerned are you that state, local and federal regulations will restrict your business?” a large majority, at 57%, responded “little.”

Similarly, 58% indicated that they had little concern that trade policies would affect business. This may be due to the industry being so global, with little change year-over-year.

Staffing

Generally, hiring new talent doesn’t seem to be a priority for 2019. In fact, 42% of respondents said they plan to keep staffing at the current level, while 32% said they may do selective hiring. Only 3% said they planned robust hiring for 2019.

This is not a big change from 2017, when 41% of the respondents indicated they were keeping their current staffing level. This can stem from companies that are still operating with caution and a focus on efficiencies and profit improvement. At the same time, Reid said, “staffing is the No. 1 issue for oilfield-services companies that can’t meet the demand for growth in the Permian.”

Schroeder added, “We are seeing more use of partnerships, joint ventures and outsourcing in the industry, and companies are also looking at new forms of talent, specifically those with mathematics, science and analytic skills.

Meanwhile, “E&P companies can range quite significantly in financial health and stability, with many growing and in need of people, while others are continuing to manage resources and liquidity that may not afford them to hire as robustly.”

Breaking it down

The survey reflects a mood of cautious optimism as the U.S. oil and gas industry and the economy have improved. Yet, volatility in the industry is always present, with supply- and demand risk and the effect of unanticipated economic factors borne from political uncertainty.

Despite strides and a seeming comfort level with technology as a whole, the industry still could improve around the use of AI, robotics and analytics—an expansion that could attract more young people who are looking for innovative roles.

Schroeder said, “We are a highly technical and innovative industry that has made amazing advancements in the way we explore for, develop and produce oil and gas, but a sector that has lagged others in the use of technology to run the business.

“We have a chance to now advance in these areas and to attract a new generation of talent that is willing to be disruptive and to be a part of a culture that fosters new thinking.”

The latest Grant Thornton/Hart Energy Survey was based on answers from 472 respondents in October 2018 in leadership positions within U.S. independent producers, midstream operators, oilfield-service companies and financial firms. Participants included CEOs, COOs, CFOs, CIOs, senior vice presidents, board members, general counsels, and tax and finance professionals. References to the 2017 survey are based on some 500 respondents with similar backgrounds.

Founded in Chicago in 1924, Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd., one of the world’s leading organizations of independent audit, tax and advisory firms.

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