Until recently, the international oil & gas industry enjoyed unprecedented growth and prosperity in the global market. The North American energy renaissance allowed U.S. and Canadian producers to become forceful contenders in the market, putting OPEC's stronghold on the industry to the test. Amid these boom times, middle market exploration and production (E&P) companies have been among the greatest beneficiaries of the market shift, successfully exploiting new resources and capitalizing on global demand for inexpensive energy supplies, according to BDO's inaugural 2015 Global Energy Middle Market Monitor. Our study found that middle market E&P companies saw significant growth in their median daily production between 2012 and 2014, increasing by 50 percent. At the same time, median yearly revenue roughly doubled, skyrocketing from $78 million in 2012 to $152 million by the end of 2014.

Even as oil prices began to bottom out in the second half of 2014, the middle market displayed remarkable resilience. Over the past three years, their median exploration and production expenditures as a proportion of revenue declined by 14 percent and 12 percent, respectively. In other words, strong revenue growth from 2012 through the first half of 2014—in addition to their ability to level-set expenditures as high production levels became less profitable—helped shield the middle market from the price rout. North American (Canadian and U.S.) middle market companies have proven especially nimble in maintaining exploration and production activities amid an uneven market. Both countries saw healthy reserve replacements among their companies, nearing or exceeding 100 percent each year. However, reserve replacements still experienced quite a bit of volatility between 2012 and 2014, with the median reserve replacement rate among North American companies reaching 182 percent in 2012, growing to 268 percent in 2013 and then dropping to 175 percent in 2014—ultimately representing about a 4 percent drop over the three-year study period. The fluctuations in reserve replacements highlight the short operational lives of unconventional resources, while also demonstrating that North American companies are able to move quickly and adjust their activities to evolving market conditions. Reliable profitability in 2012 and 2013 also helped offset losses in 2014. On a global scale, price-earnings (PE) ratios remained stable in 2012 and 2013 before dropping in 2014, aligning with oil price trends over the past three years. The median PE ratio across all companies was steady in 2012 and 2013 at a multiple of 15. However, over the course of 2014, the median PE ratio declined by one-third to a multiple of 10, highlighting the deleterious impact of the decline in oil prices in the second half of the year. For U.K. companies, whose profit margins rely less on domestic conditions than foreign exports and global trends, PE ratios suffered slightly less; the median dropped only slightly from 11 in 2012 to 10 in 2014. Our study also found that energy companies became more leveraged, with the middle market increasing their reliance on debt financing to make strategic investments. From 2012 to 2014, the median debt ratio reported across all companies in the sample grew from 47 percent to 58 percent as governments lowered interest rates to stimulate economies and decrease the cost of borrowing. Overall, 2015 BDO Global Energy Middle Market Monitor found that while the oil & gas industry may best thrive in a high commodity price environment, flexibility may be a more important asset for long-term business stability. For the middle market, quickly reining in expenditures allowed companies to remain profitable even as the market decelerated. As the new year approaches, we can expect to see E&P companies of all sizes make similarly concerted efforts as they continue producing critical energy resources and look for ways to cushion against future losses and continued market uncertainty. This guest post has been written by Charles Dewhurst, Global Leader of the Natural Resources industry group at BDO. He can be reached at cdewhurst@bdo.com.


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