Oil companies focus on liquidity, efficiency

Oil and gas companies report that their immediate focus is on maintaining liquidity and promoting operational efficiency in preparation for an eventual economic upswing, consultants and analysts said.

Jan 16th, 2009

Paula Dittrick
Senior Staff Writer

HOUSTON, Jan. 16 -- Oil and gas companies report that their immediate focus is on maintaining liquidity and promoting operational efficiency in preparation for an eventual economic upswing, consultants and analysts said.

James Metcalfe of UBS Investment Bank told a Jan. 14 Black & Veatch LLP energy briefing that chief executive officers have changed their discussion topics during recent conference calls with analysts.

"A CEO says, 'I'm not going to be talking about growth, I'm going to be talking about liquidity and how we're still going to be here,'" after the economy improves, said Metcalfe, who directs global power banking for UBS and advises utilities, nonregulated power companies, and alternative energy companies.

In its 2009 Energy Industry Outlook, Deloitte LLP said companies need to address "the longer-term, two-sided issue of increasing demand and constrained supply," while also managing the immediate fallout from volatile commodities prices.

The economic downturn and continuing credit crisis are pushing down energy prices because of near-term slowing demand. Meanwhile, industry faces likely accelerated regulatory activity at state and federal levels.

FBR Capital Markets analysts expect Congress will pursue long-term green energy financing in climate law. This comes when the oil industry "has few natural defenders left on Capitol Hill as a result of industry consolidation, retirements of senior oil-state lawmakers, and the change in [congressional] party leadership" FBR said.

Ernst & Young LLP suggests oil and gas companies go into a disciplined capital allocation mode based on a long-term view of pricing and demand. Deloitte agrees with a long-term view despite the current economy.

Deloitte advises companies to consider how they might use assets to finance new programs, partnerships, and acquisitions that decrease US dependence on oil imports, support increased domestic production, reduce energy requirements, promote efficiency, and spur development of alternative and renewable energy sources.

Long-term demand climbing
World demand for energy is increasing at an ever-faster pace. The International Energy Agency projects total world consumption for marketed energy will increase by 50% through 2030. If this projection holds true, the world would use more energy during the next 50 years than in all of recorded history, Deloitte said.

Fossil-based energy is expected to remain the dominant energy source through the predictable future but supply is not keeping pace with demand. Oil and gas are getting harder and more costly to find and produce with accessible reserves being in deep water and arctic regions.

In addition, countries such as Saudi Arabia, Russia, China, Venezuela, Brazil, and Malaysia—which own the world's largest reserves of oil and gas—continue to limit or restrict access to international oil companies.

Finally, natural disasters or geopolitical conflicts also could jeopardize energy prices and supply levels.

"The price of energy is expected to lead the economic turnaround, although it is difficult to tell when that will happen," Deloitte said, adding that companies having solid balance sheets will be in the best position to take advantage of future acquisition opportunities.

The credit collapse has created liquidity challenges for oil companies and contributed to fewer merger and acquisition transactions.

E&Y's Energy Center notes the number and dollar value of transactions declined in 2008 compared with 2007. First-half 2008 saw a decline of 2-5% in transaction activity compared with the same period a year earlier while second-half 2008 experienced a 30% decline from year-earlier levels, E&Y reported.

In an E&Y webcast on Dec. 9, 2008, more than 70% of nearly 600 respondents said they believe it will be more than 12 months before the oil and gas mergers and acquisitions market resumes significant activity levels.

"Credit will start flowing again," said Charles Swanson, E&Y Houston area managing partner. "When it does, companies will be subject to much greater scrutiny. Those who are successful at raising capital should be the companies with their financial houses in order."

Contact Paula Dittrick at paulad@ogjonline.com.

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