For E&P sector, slow but steady growth

Annual survey finds consolidation and a focus on core areas moving into 2019

Oil refinery plan A desire for steady growth amid relative optimism about the economy shaped findings of the Grant Thornton/Hart Energy Survey conducted in fall 2018.* Operators in the exploration and production (E&P) industry are expected to sharpen a focus on core areas and on cost management and profitability. They did not rule out acquisitions as a way to grow, with an eye toward the right business fit and a mitigation of risk.

Supporting survey findings, Kevin Schroeder, Grant Thornton Energy Industry managing partner, observed: “We are seeing a trend of consolidation especially by larger companies looking to increase holdings and focus on core basins, such as in the Permian basin, while also seeing the industry rapidly respond to infrastructure challenges that have put production growth at risk.”

A disciplined approach to growth was indicated by findings that the majority of operators have been able to keep production flat. For the second year in a row and only the second time in the survey’s history, more than half of operators — 57% this year — did so.

Operators are keen to shore up areas they know best in the following ways:

  • Strategy — 40% plan to pull back to a few core areas and sharpen focus on them.
  • Capital expenditures — 53% said they plan to stick to core area drilling and development, while 50% want to focus on spending CAPEX more efficiently. Only 15% said they’d drill in new areas.
  • Savings and revenue — 47% of respondents said they are using incremental improvements throughout the value chain to reduce costs or increase margins.

Hart energy chart 2

“Coming out of the 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 KPIs of the past. We see companies operating with focus on efficiency, return and profitability improvement.”

Most companies, at 90%, indicated they do not plan to increase foreign expenditures. Said Schroeder, “Production costs offshore remain higher as compared to the shale and onshore opportunities in the U.S. Companies and investors are certainly eyeing offshore exploration and development opportunities, but at this point onshore U.S. continues to prevail.”

Staffing remains constant Hiring new talent was not a priority for 2019, with 42% of respondents saying they plan to keep current staff levels and only 3% saying they planned robust hiring. This could be a result of companies focusing on efficiencies and profit improvement.

Yet staffing is a big issue for oil field services companies that can’t meet the demand for growth in the Permian.

“Today 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,” Schroeder commented. He added that there is 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.”

An interest in A&D Operators are interested in A&D. Forty percent of operators — the largest chunk by a wide margin — said they plan to increase A&D activity.

Hart energy chart 1

Those who planned A&D activity in the coming year expressed concerns around commodity price fluctuations and differing buyer and seller expectations. When asked if they consider buyer-seller pricing to be stabilizing, 52% of respondents said no, up slightly from 48% who said no last year. This could reflect an improved market and more buoyant economy in which it’s harder to find distressed assets to buy. Producers may likewise feel less pressure to sell.

Technology ups and downs It’s well established among E&P operators that technology, especially in applying artificial intelligence (AI) and competitor metrics, is invaluable to run a smart business. Forty-eight percent of respondents said obtaining data around reservoirs, fracking and completions was the most relevant “big data” information they needed.

Yet respondents also said they have difficulty obtaining technology service and supply advice, and play and basin analytics.

Cybersecurity dropped in importance as a major tech issue from the 2017 survey, with only 7% citing cyber issues and vulnerabilities as a big risk. “Many in the industry may be complacent about cyber threats, 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,” said Schroeder. “We shouldn’t wait for an event to happen to get our attention.”

Regulations and risk Most respondents — 58% — expressed little concern about trade policies restricting their business, while 19% were very concerned. Similarly, 57% expressed little concern that federal, state and local regulations would restrict business in 2019. This compares with 28% who thought they would.

Despite the majority’s relaxed view of policies and regulations, operators cited regulatory hurdles and delays as key risks, followed by the ability to close on A&D. Safety and environmental issues were cited as a key risk by fewer than a quarter of respondents. “This number could be higher,” said Michael Osina, partner, Tax Services, Grant Thornton. “More focus on environmental stewardship could broaden the public’s view of the industry and attract younger people, particularly millennials.”

Breaking it down The survey reflected a mood of cautious optimism, yet volatility in the industry is always present, especially due to supply and demand risk and geopolitical factors, as indicated by the recent decline in oil prices to below $50 at the end of 2018.

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 looking for innovative roles.

“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,” Schroeder said. “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 be part of a culture that fosters new thinking.”

Some key survey findings with respondents’ top 2 answers given
  • Where operators would put extra dollars from a business — 32% in acquisitions, 24% in increasing production from existing wells
  • Where they’re prioritizing CAPEX spending — 53% in core-area drilling and development, 51% by focusing on more efficient spending
  • Future plans given their current cash-flow position — 56% to maintain current activity, 18% to hold steady
  • Biggest operational infrastructure challenges — 34% in maintaining efficient internal processes (the next highest number, 23%, checked N/A)
  • Organizational structuring strategies that are most important today — 32% said decision to sell or merge (39% checked N/A)
  • Business risks their company faces — 42% said regulatory hurdles and delays, 37% said ability to close on A&D
  • Plans for U.S. capital spending in 2019 vs. 2018 — 40% plan to increase, 24% plan no change
  • Information they have trouble obtaining to effectively run their business — 32% said technology service and supply advice, 30% said play and basin analytics
  • Big data and data analytics they find most relevant — 48% said technology data related to reservoirs, fracking and completions, 40% said M&A and A&D transactions and metrics (followed very closely by forecasting data and industry activity data)
  • What their company is doing to reduce cost efficiencies or increase margins — 47% said incremental improvements throughout the value chain, 25% said holding service company costs flat
  • What sources of capital their company primarily accesses — 70% said cash flow from operations, 44% said private investors or partners
  • Regulatory issues significant to business decisions — 52% said water disposal issues, 43% said state and local regulations on fracking

*About the survey

The latest Grant Thornton/Hart Energy Survey was based on answers from 472 respondents collected in October 2018. Respondents were C-suite and senior executives from U.S. independent producers, midstream operators, oil field service companies and financial companies. Participants included CEOs, COOs, CFOs, CIOs, senior vice presidents, board members, general counsels, and tax and finance professionals. References to last year are based on the survey done about this time in 2017, drawn from about 500 respondents with similar backgrounds.

About Hart Energy

For more than 40 years, Hart Energy editors and experts have delivered market-leading insights to investors and energy industry professionals. The Houston-based company produces magazines (such as Oil and Gas Investor, E&P, Midstream Business and FUEL), online news and data services, and geographic information system data sets and mapping solutions. It hosts industry conferences (such as the DUG™ series) and provides a range of research and consulting services. Visit for more information.

Contacts Kevin SchroederKevin Schroeder
National Managing Partner, Energy Industry, Grant Thornton
T +1 405 415 3550

Bryan BenoitBryan Benoit
National Managing Partner, Corporate Value Consulting, Grant Thornton
National Managing Partner, Energy Advisory, Grant Thornton
T +1 832 476 3620

Michael OsinaMichael Osina
Partner, Tax Services, Grant Thornton
T +1 832 476 3694