Deloitte: Volatile Commodities Prices Altering Investment Cycles

Deon Daugherty

Following a high volume growth period, many oil and gas companies now need to pursue new capital strategies and allow more flexibility, according to an April report from Deloitte, “Following the Capital Trail in Oil and Gas.”

The research firm found that traditional ways of attracting and deploying capital have given way to new ways to raise capital from lost-cost investment approaches, repurposing noncore assets to improve the bottom line, as well as optimizing cost structures by seeking repeatability and automating in processes.

Energy and research raised more than $1.5 trillion during the last five fiscal years, almost half the total generated by other industries. Generally, the vast amount of those dollars came from the oil and gas sector. Between 2009 and 2013, the industry raised $850 million, which accounted for 27 percent of all new capital raised during the period.

This influx of capital was spurred by increasing oil prices, which transformed oil and gas into one of the fastest growing sectors. Revenue increased by 60 percent during the last five years, stretching to $6.6 trillion for FY13-14. Other industries grew, too, but not at the prolific rate of oil and gas.

Manufacturing revenue grew by 32 percent; life sciences and health care revenue increased 27 percent; and technology, media and communications grew by 21 percent.

Spending in the oil and gas sector also surged. During the last five years, spending grew by 50 percent to a whopping $890 billion in the last fiscal year. That’s compared to relative growth of 40 percent in the real estate industry; 36 percent in consumer business; 27 percent in life sciences and health case; and 27 percent in technological fields.

Gregory Bean, a director at Deloitte and one of the report’s authors, told us in a recent interview that while industry insiders were well aware of the massive increase in upstream spending globally, it was interesting to compare activity in the sector to other industries both in equity and debt.

How oil and gas firms have reacted has been more predictable. Short term, there has been reduction in shale spending and large cap projects, but it’s early to say how many of those projects may be revisited if prices stabilize at a higher rate.

Operators were able to throttle back drilling onshore North America, and Bean said that in the short term, exploration drilling has been postponed. For projects that have already developed offshore, drilling will likely continue. Cancellation fees can cost a company between 20 and 40 percent of the project’s cost balance. It may make more sense to channel investments into projects where the company has already invested, he said.

“It poses an opportunity for many other sources of capital in the industry. The sources and mechanics of capital have greatly increased, both in the upstream and midstream,” he said.

Coupled with the fact that today, there are even more sources of capital, the reintroduction of short cycle sub-sector investments has created an industry that is likely to be more dynamic and volatile, he added.

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