SEC Disclosure Rule Could Hurt Energy Companies’ Competitive Advantage by BDO

The 2016 BDO Global Energy Middle Market Monitor reviews and analyses financial data reported by 304 publicly traded middle market oil and gas companies from 37 country and international stock exchanges from 2010 to 2015. The companies analysed reported revenues up to $1.5 billion, with median revenue of $67.6 million. Companies were primarily traded on exchanges in Australia, Canada, the United Kingdom and the United States. All data was sourced through S&P Capital IQ.

See methodology note toward the end of this report for more information.

“The middle market has been instrumental to the growth of the international energy sector, helping to decentralise the industry and spread the wealth well beyond OPEC to all corners of the globe. But the rapid growth we saw over the past decade was unlikely to last, and it appears that many may have lost sight of the energy industry’s susceptibility to boom and bust cycles. But now that the oil price downturn has checked our collective hubris, we are in a position to reorient, re-evaluate and rebuild.” – Charles Dewhurst, Global Leader of the Natural Resources practice at BDO

SEC Disclosure Rule Could Hurt Energy Companies’ Competitive Advantage – Introduction

It has been two years since oil prices began their precipitous fall in mid-2014, ending the energy sector’s most recent boom and kicking off a protracted bust. With prices declining as much as 70 percent since June 2014, many of the middle market independent producers that entered the game at its height are now facing significant losses and a very real threat to their longevity in a down market. Prices have begun to rebound, reaching the $50 per barrel mark in June 2016, but we still have a long way to go before the energy industry achieves healthy growth once again.

In the 2016 edition of the BDO Global Energy Middle Market Monitor, we explore what these losses mean in terms of revenue declines, wavering investor confidence and the ability to compete with the leading industry players. Our top takeaway? No one has been immune to the price slump, and companies may be forced to make difficult choices in order to survive—but those who are able to make smart cuts and seek out creative financing opportunities are best poised to thrive when the market finally turns around.

Revenue Drop Hits North America Hardest

Year-over-year changes in median annual revenue highlight that the pain of the price slump truly hit the global energy sector in 2015: The median revenue across all companies assessed fell by about 30 percent, from $96.9 million USD in 2014 to $67.6 million in 2015.

The United States and Canada saw the most dramatic slashes to their revenues over the past year, with Canadian-listed companies’ and U.S.-listed companies’ median revenue declining by 41 percent and 44 percent, respectively. Meanwhile, Australian median revenue more or less remained stable from 2014 levels, and U.K. median revenue decreased by just 4 percent. The size of the industry in each region appears to have influenced the relative magnitude of the shifts in each country—according to the U.S. Energy Information Administration, the United States and Canada combined produced about 18 million barrels of oil equivalent per day (BPD) in 2014, compared to 906,000 BPD in the U.K. and 473,000 BPD in Australia. In other words, those countries with the most sizable oil and gas sectors were likely to feel more impact.

Energy Companies

Energy Companies

“Canada’s economy has been struggling for more than a year now, teetering on the brink of a full-blown recession—much of which is attributable to oil prices’ impact on the Canadian natural resources sector. In fact, recent projections have suggested that the oil production cuts forced by the Fort McMurray wildfire in Alberta are significant enough to wipe out the potential for any national economic growth in Q2 2016.” – Michael Madsen, National Leader of BDO Canada’s Natural Resources practice

Profits Dip to Five-Year Lows

As revenues have slipped, so have profits for middle market oil and gas companies. Globally, median pretax income declined from $5.9 million in 2014 to a net loss of $30.2 million in 2015, an overwhelming 614 percent decrease. After taxes, net income dropped from $5.1 million to a loss of $30.5 million, a sevenfold decline. This data broadly reflects the volume of impairments energy companies were expected to incur as the gains of the 2010 to 2014 period eroded.

On a country-by-country basis, Canada and Australia saw the largest proportional drops in median pretax income (seeing declines of 22 times and 27 times their 2014 levels, respectively), while the U.K. and Canada saw the most significant decreases in median net income (recording declines of 19 times and 13 times 2014 levels, respectively). U.S.-listed companies posted the most substantial losses in terms of raw dollar amounts, with median pretax income declining by $175.1 million year over year and median net income decreasing $133.2 million. However, these losses amounted to an approximately 400 percent decrease from 2014—the smallest proportion seen in this year’s study.

With companies throughout the study consistently posting losses in 2015, we found that the median effective tax rate both globally and regionally came to 0 percent, reinforcing the broad economic pain caused by the price rout: Individual companies are struggling, the industry is reeling and governments worldwide are losing out on a key source of tax revenue.

Energy Companies

Energy Companies

Investor Returns Plummet

With revenues and profits tumbling over the past year, investors have begun to sour on middle market oil and gas companies globally. The median market cap across all companies studied dropped to $91 million in 2015 from $219 million in 2014, a 58 percent decline. Canadian-listed companies experienced the most painful contraction, with the median market cap falling by 76 percent, while the other primary countries studied posted declines more in line with the overall median.

Unsurprisingly, historic price-earnings (PE) ratios took a hit, as well. Last year, our study found that strong performance through the first half of 2014 helped cushion PE ratios from falling as sharply as oil prices did in the back half of the year. However, with no such buffer in 2015, PE ratios decreased abruptly as earnings—and investors’ expectations about performance—faltered. The median historic PE ratio fell to 6.4 this year, down from 12.4 last year and from the overall high of 25.6 in 2010.

Australia saw the most dramatic decline in median PE ratio from 2014 to 2015—69 percent—while the U.K. saw the median PE ratio drop by just 28 percent. U.S.-listed companies tracked fairly close to the overall median, with their median PE ratio declining by about 53 percent.

Energy Companies

Energy Companies

“The highest average oil price in the last five years occurred in 2013, and for the same period, U.K. AIM-listed oil and gas companies enjoyed their highest market capitalisations. However, the decline in oil prices over the last 15 months has had a more dramatic effect on these companies’ market

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