Study: Middle Market Companies Lead Pack in Global E&P Growth

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Special to Pipeline & Gas Journal

Over the past decade, the international oil and gas industry has enjoyed unprecedented growth and prosperity. The renaissance of North American energy production has introduced abundant new supply to the global market, promising to meet rapidly-growing demand and loosening OPEC’s tight grip on the industry.

In the midst of these boom times, middle market companies have seen some of the greatest success in exploiting new energy resources and capitalising on global appetite for inexpensive supply.

According to energy consultant BDO’s 2015 Global Energy Middle Market Monitor, middle market exploration and production (E&P) companies saw their median daily production grow by 50% between 2012 and 2014, accompanied by a near-doubling of revenue – from a median of $78 million in 2012 to $152 million by the end of 2014.

Indeed, the robustness of this growth has largely helped shield the middle market from the worst effects of ongoing malaise in the commodities markets, with median exploration and production expenditures as a proportion of revenue declining by 14% and 12%, respectively, over the past three years.

“A new order for the global oil and gas industry has emerged over the past decade as innovation unseated conventional resources and propelled new entrants to the market to the fore,” said Charles Dewhurst, global leader of the Natural Resources industry group at BDO. “Middle market companies have been some of the greatest beneficiaries of this paradigm shift, and with some smart planning, could be poised to emerge from the past year’s commodity price drop stronger than ever.”

These findings, report, which reviews and analyses financial data reported by 265 publicly traded middle market oil andgas companies from 25 country and international stock exchanges covers the 2012-2014 period. The companies analyzed reported revenues up to $4.95 billion, with median revenue of $110 million, and were primarily traded on exchanges in Australia, Canada, the United Kingdom and the United States.

Additional findings from the BDO 2015 Global Energy Middle Market Monitor include:

North American E&P companies maintain a torrid reserve replacement rate. Middle market companies in Canada and the United States have proved 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% in 2012, growing to 268% in 2013, and then dropping to 175% in 2014 – ultimately representing about a 4% drop over the three-year study period.

“The oil and gas industry is accustomed to thriving in an essentially speculative environment, but the speed at which this latest boom and bust cycle occurred is atypical,” said Dewhurst. “While unconventional technologies allowed operators, particularly the smaller ones, to prove and produce their holdings during a period of high oil prices, these operators also enjoyed the ability to level-set expenditures when the market changed. That flexibility will be an important asset when the next shift occurs.”

Reliable profitability in 2012 and 2013 offsets 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 effect of the decline in oil prices in the second half of the year.

Energy companies are becoming more leveraged. As the oil and gas sector continued to expand globally, so did middle market companies’ reliance on debt financing to make key investments and grow their businesses.

From 2012 to 2014, the median debt ratio reported across all companies in the sample grew steadily from 47% to 58% – growth likely facilitated by low interest rates implemented by governments to stimulate sluggish economies. This leverage, however, has a significant downside: It left many companies in a precarious position when oil prices plummeted, subsequently reducing their ability to meet their debt service requirements.

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