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Positioning for recovery: the state of the exploration and production industry

State of exploration and production industryEven as the exploration and production industry shows signs of recovering from a period of pressure and uncertainty, Kevin Schroeder, leader of Grant Thornton LLP’s national Energy practice, cautioned: “I don’t think we’re coming back to $100 oil anytime soon. Companies have to produce oil and gas for less.”  

It’s a new normal that producers must learn to operate within. It will take a change in thinking. In the 2016 Grant Thornton/Hart Energy survey, only 17% of respondents said they were ready to move quickly when the market recovers. Some 52% indicated that their current cash position allows them to only maintain current activity. Just 15% would add new rigs, and only 1% would add drilled but uncompleted wells.

Producers will need to secure talent lost during the downturn, invest in more efficient operations based on better data and analytics, and shore up their balance sheets.

“I don’t think we’re coming back to $100 oil anytime soon. Companies have to produce oil and gas for less.” — Kevin Schroeder, Energy Practice leaderRestoring talent after deep cuts
As prices collapsed, the industry sharply cut staff, but that trend is subsiding, and some producers are beginning to hire. About 45% of survey respondents indicated they plan to keep current staffing levels; 31% have either begun hiring or plan to start hiring in 2017, and only 14% plan further cuts.

But adding staff could be impeded by a high percentage of industry workers — baby boomers — preparing for retirement, and laid-off workers hesitating to recommit to such a volatile business. When prices recover, producers may find the next generation of talent through reviewing processes, and outsourcing or offshoring routine functions. John LaBorde, Grant Thornton’s Energy Tax leader, commented: “We’re seeing that happening in the tax area. For example, some of the large integrated energy companies have offshored portions of their tax compliance function. Reducing infrastructure for routine functions makes it easier for companies to ramp up in recovery and keep the best talent focused on the highest value-add activities.”

"Reducing infrastructure for routine functions makes it easier for companies to ramp up in recovery and keep the best talent focused on the highest value-add activities.” — John LaBorde, Energy Tax leaderRediscovering and re-investing in technology
Technology advanced while producers worked on surviving the downturn. As a result, technologies and systems are outdated and inefficient, and the benefits of data analytics, cloud computing and improved communications are being missed. In the survey, 25% of respondents indicated that access to relevant data for decision-making is their biggest technology infrastructure challenge. Play/basin analytics, which would help them run their business, was difficult to obtain for 33% of respondents.

Schroeder commented on this scenario: “There is a benefit to improved real-time information for decision-makers. Well performance is an example. Better use of analytics could optimize decisions around water content. Better data could improve controls on expenditures and essentially provide real-time information on each well to better handle the next cycle.”

Shoring up balance sheets, and returning to basics
The combination of falling profits and tightening credit markets has led to an industrywide focus on balance sheets. Any rise in investment activity puts severe working capital demands on already constrained balance sheets.

Better news is on the horizon. Although about 40% of survey respondents think obtaining capital is slightly or much more difficult this year than last year, that’s down from 54% in the 2015 survey. Constraints to acquiring capital may be easing, if only moderately.

Shoring up the balance sheets allows cherry-picking the best assets from struggling competitors, and many strong producers are using this opportunity to concentrate holdings in the fields they know best.

Collaborating to benefit industry and environment
Producers are increasingly working together to meet their challenges. Consolidating field services such as water handling, recycling and disposal was named as the best potential for operational efficiencies by 25% of respondents. A top desire was for more openness and transparency in data and data analytics across the industry, e.g., in drilling permits, rig counts and reservoir information.

Common ground could be found in national energy policy to address legitimate environmental concerns; this would simplify piecemeal policies that vary across state or even county lines. A fresh view on energy policy could challenge regulatory restraints that no longer make sense, such as the ban on exporting crude. Transparency in critical data could help all producers better manage their business and control risks, and anticipate and prepare for cycles.  

Showing optimism
The survey points to an industry cautiously optimistic about growth and the future. An increase from 2016 to 2017 in U.S. capital spending is expected by 45% of respondents, and a decrease is expected by less than 10%.

The overwhelming influence will continue to be commodity prices. While individual producers can do little about this, they can find top people, make smart investments in technology and burnish their balance sheets. They can collaborate on smart policy that helps them manage their business and helps the country manage its energy needs into the future.