The last barrel

Although I’m not ready to sound the “all clear” signal just yet, according to the 21st CEO Survey by PwC, “There’s an unfamiliar atmosphere in the executive offices of many oil and gas companies these days—an atmosphere of optimism.” For the first time since crude prices nosedived in 2014, a majority of industry CEOs surveyed say they believe global economic growth will improve in the next 12 months. Moreover, 83% of CEOs report that they are confident in their companies’ prospects for growth in the next 12 months, and 91% say they’re very or somewhat confident of revenue growth over the next three years.

This mindset was confirmed by a 2018 Confidence and Control report by DNV GL, which affirmed “A fresh sense of optimism has emerged in the oil and gas industry over the past year. Looking ahead to 2018, 63% of the senior oil and gas professionals surveyed are confident about growth. Although this is significantly less than the 88% recorded before 2014, it is nearly double the 32% reported just one year ago. Respondents were also confident about their organizations’ prospects for reaching revenue and profit targets in 2018. 

Anxiously optimistic. “A combination of two things has brought confidence back to the industry,” says Maria Hanssen, CEO of DEA Deutsche Erdoel, Germany. “The first is an uptick in prices. Short-term increases seem to drive a lot of sentiment about longer-term perspectives. Second, both running and investment costs have come down.” The DNV GL research suggests the cost reductions and new efficiencies are key to the current sentiment. “The change in confidence is based on lowering costs, so operators can make a reasonable ROI, even at $55/bbl.” This view was echoed by Thore Kristiansen, COO of E&P, at Galp. “It seems that we are beyond the bottom of this cycle and are slowly heading up.” Respondents from large companies have significantly stronger confidence in both industry growth and the prospects for their organizations, compared with those from medium-sized and small companies.

Reducing costs/organic growth drive profitability. Most E&P companies have cut costs, enabling them to increase profitability, even absent rising commodity prices. “The ability of the industry to reduce expenditures and prepare for something different to the past is a reason for some confidence,” says Eirik Wærness, chief economist, Statoil.

And with the largest global economies expected to grow in 2018, CEOs believe that demand for energy will remain strong. This suggests an end to entrenchment and the start of a new phase, with increased access to capital, that will enable companies to grow. A large majority of CEOs (83%) said that organic growth will help drive profitability.

While most CEOs believe increased global demand will be the main driver of growth, they don’t dismiss the value of inorganic growth. Strategic alliances have emerged as an important lever, with 60% of CEOs saying that partnering will be critical in delivering growth. Companies in every subsector have forged alliances, aimed at creating value through risk- and knowledge-sharing, increased investment capacity, and stronger corporate governance. In other cases, companies are partnering with technology companies to speed the application of emerging digital technologies. And 39% of the CEOs surveyed say M&A will be a factor.

Market stability provides firm foundation. While higher prices were partly responsible for improved confidence, DNV GL says reduced commodity volatility in 2017 was more important to the improved outlook. “Interestingly, the magnitude of the increase in confidence is dramatically greater than the increase in the oil prices.” The crude ETF volatility index is at its lowest level since September 2014. “One of the main reasons why there is more optimism is because oil prices have stabilized,” says Frank Ketelaars, DNV GL. “When prices are volatile, there is more uncertainty about strategy—stability allows some predictability to return.” Just 37% of the survey respondents said oil price would be a barrier to growth for 2018, compared with 64% a year ago.

Bears chip in. However, some survey participants believe the current price situation isn’t sustainable, “the confidence and stability we are seeing are deceptive,” says Edward Morse, Citigroup. “The most significant response to higher oil prices has been an increase in capital spending, which will turn into a supply surplus much quicker than the market thinks. We believe the optimism will begin to deteriorate rapidly and, by 2019, OPEC and Russia will bring production back to avoid losing market share, and we will be back to a $40-45/bbl price environment.”

Hiring returns. Nearly half of CEOs say that they expect headcount to increase, compared with only 12% predicting a decline. The survey also reveals that companies, which have long been technology-intensive at the wellhead, are beginning to extend these capabilities (especially digital) to the rest of their operations, cites Niloufar Molavi, PwC global O&G leader. But some things haven’t changed. CEOs continue to mention over-regulation as a leading threat to their businesses, along with changes in tax regimes, the geopolitical environment and cyber threats.

New platform for growth. The c-suite guys at large E&P companies always see the glass as half-full, but it’s clear the clouds are starting to lift. This sentiment, while not universal, appears to be built on a belief that companies have evolved adequately to remain solvent against a backdrop of lower-for-longer prices. However, as profitability returns, the risk of returning to old spending habits could unravel recent cost reductions and strategic recalibration. Statoil’s Eirik Wærness is optimistic: “I think the industry has learned a lesson that will have lasting impact. Many changes will remain in place, because it makes no sense to go backwards, now that we have found smarter ways to operate.” Only time will tell.

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com