Ernst & Young Q3 Oil & Gas Outlook: Bright Spots Emerge Despite Looming Economic and Regulatory Uncertainty

Thursday, Jul 29, 2010

While signs of economic stability surfaced at the close of Q1, the oil spill in the Gulf of Mexico, followed by less-than-positive consumer and business confidence reports, have created considerable uncertainty for the oil and gas industry.

"The energy industry is facing significant unknowns right now," said Marcela Donadio, Americas Oil and Gas Leader for Ernst & Young LLP. "The offshore industry in the Gulf of Mexico is effectively at a standstill, awaiting the findings from the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling. At the same time, we are closely watching the markets for any economic developments that could have an impact on demand growth."

Oil (see data graphs in news release at: http://www.ey.com/US/en/Newsroom/News-releases)

Oil prices have been remarkably constant. More modest consumption habits and weak developed economies have eased demand pressures creating consistent prices in the $70 to $80 per barrel range for nearly a full year. Pending any swings in the economy, prices are expected to remain relatively stable in the short to medium term.

Natural gas (see data graphs in news release at: http://www.ey.com/US/en/Newsroom/News-releases)

North American gas fundamentals remain weak driven by fairly weak demand and strong production growth. So far we have not see the kind of demand growth some organizations are expecting for the year. However, producers continue to invest substantially in unconventional gas plays, particularly shale, suggesting a positive long-term outlook. There remains some concern over future regulatory actions that would limit hydraulic fracturing due to potential environmental damage, particularly to water supplies.

Downstream

After a very difficult second half of 2009, refining margins have moved up and are back to where they were before the 2005-2008 boom. Still, additional refinery closures may be necessary in the US as capacity comes online in Asia and the Middle East. Pressures remain on refiners to maintain liquidity and cash flow.

Oilfield services

For the time being, the oilfield service (OFS) sector is facing a relatively weak economic environment following the upstream spending decline of 2009 and downward pressures on utilization and day rates. Spending is expected to increase in 2010 and signs of improvement are at hand as rig utilization rates have ticked modestly upward.

"Even though the events in the Gulf of Mexico have been difficult for the OFS sector, ultimately, we expect to see investment in equipment and resources to improve the safety and reliability of offshore and onshore operations. Broadly speaking, this is expected to financially benefit the oilfield services equipment manufacturers, while bolstering more technological advances," said Donadio.

Transactions

M&A activity in the energy sector during the first half of 2010 increased, with global deal value reaching almost $135 billion - up almost 50% over the prior year. There were 420 deals announced through the first two quarters, versus 334 deals during the same period in 2009.

"Energy M&A activity is starting to increase in the deal markets, and we expect that to carry through the second half of 2010, particularly in emerging markets," said Jon McCarter, Transaction Advisory Services Leader, Americas Oil & Gas Center, Ernst & Young LLP. "However, the environment could change significantly with the passage of new energy policy legislation or setbacks in the global economic recovery," McCarter noted.

Source: PR Newswire