US perspective on the market
If the last few months of 2016 were characterized by cautious optimism, then the first few months of 2017 can be characterized as a small sigh of relief as all signals point toward a slow but steady recovery for the US oil and gas industry. Forecasted capital spending is on the rise for 2017. According to a recent report released by IHS, US E&P Independents’ 2017 planned capital spending is forecasted to increase by 45% for this year. For the E&P companies analyzed in the report, all have reported plans to reverse last year production declines. The increased capital spending is resulting in higher rig counts. For the thirteenth consecutive week, the US rig count increased yet again – reaching its highest level in two years. We also continue to see robust merger and acquisition activity as companies continue to rationalize and optimize their portfolio. In the Permian basin alone, upstream deal flow continued to accelerate during the first quarter of 2017. Over $18B in transactions have already been announced in the Permian – representing over 70% of the full year of 2016. Still, the S&P Energy Sector ETF (XLE) is down more than 6% 2017, while the S&P 500 is up 5% - potentially representing a great bargain for long-term investors. To continue reading, click here.
While the above factors are all positive indications towards a continued industry recovery, two questions remain. What will 2017 bring for oil prices and how will this recovery (assuming we are trending towards a recovery) translate into jobs for the industry? While the most certain aspect of oil price is the uncertainty, there are some signposts that might give an indication of where prices may be headed. The US Energy Information Administration (EIA) recently lowered the outlook on its crude-price forecast with WTI crude of $54.24/bbl but raised 2017 forecasted production output to 9.22 million barrels a day. However, the IEA indicated that global oil supply and demand appear to be rebalancing after more than two years of oversupply. One key question that remains is if OPEC members will be willing to extend production cuts beyond the June expiration. With Saudi Aramco scheduled to IPO in 2018, the Saudi royals are certainly incentivized to continue to curb output that will ultimately draw down inventories and drive higher prices in the market. Finally, although Syria’s contribution to the global oil supply is relatively small at an average of 30,000 barrels per day, any military actions involving the Middle East are bound to cause some uncertainty in commodity market.
As for the impact on the oil and gas job market, it is still too soon to predict. Bloomberg estimates that the oil price collapse eliminated 440,000 jobs, and anywhere from one-third to one-half of those jobs may never come back. The reasons for this are multifaceted – companies were forced to find ways to operate much more efficiently during the downturn, and these efficiencies will carry over into the "new normal." Asset portfolios have been optimized and many companies are now operating with a smaller, more synergized footprint. Last but not least, emerging technologies such as robotic process automation, cognitive, and cloud computing are being rapidly adopted and providing significant efficiency and cost benefits eliminating the need to scale the new organization in a "one-for-one" model compared to years prior to the downturn.
By and large, a swift recovery in oil prices remains unlikely but there are positive signs that things may be headed in the right direction. Just don’t call it a comeback … yet.
– Angie Gildea, Partner, Americas Oil & Gas Lead, KPMG in the US