Energy CFOs expect low earnings growth
Chief financial officers of some of the largest energy companies are more pessimistic than the rest of the business community on earnings growth this year, according to a new survey by the consulting firm Deloitte.
Despite a domestic energy boom, energy sector executives also forecast the second-lowest sales growth and domestic personnel growth of any industry included in the study.
The study surveyed more than 100 CFOs from some of North America’s largest companies, most of which are publicly traded and have annual revenue in excess of $1 billion.
The findings may seem counterintuitive, given the surge of oil and gas production at home. But the authors say it’s not entirely a surprise.
Paul Horak, U.S. audit leader for oil and gas at Deloitte, said energy companies face natural gas prices that are low and crude prices that are flat at a time when they’ve been spending big.
“Revenue is not on the upswing, costs have gone up generally, and therefore, margins have been squeezed,” Horak said.
The energy industry CFOs forecast earnings growth of 4.1 percent this year, less than any other sector surveyed, and sales growth of 1.9 percent, second-worst only to the telecommunications-media-entertainment sector, whose executives forecast a 1.2 percent decline.
The energy financial chiefs also predicted a 0.3 percent decline in domestic personnel at a time when most other executives surveyed planned on adding staff. Again, only the communication-entertainment executives surveyed were more pessimistic than their energy counterparts, projecting that worker numbers will shrink 1.3 percent.
Names aren’t disclosed
The quarterly survey included 13 energy industry CFOs, but Deloitte doesn’t disclose their names in order to get more candid responses.
Patrick Jankowski, vice president of research for the Greater Houston Partnership, said the findings are consistent with his observations.
As the U.S. economy began clawing back from the downturn at the end of the last decade, Houston thrived, buoyed by the booming oil and gas industry, while other metro areas struggled, Jankowski said. Now the area is starting to feel the effects as the energy sector returns to a more sustainable pace and pulls back from its frenzied expansion of recent years. He said he’s observed a slowdown in the industry since mid-2013.
“If the oil and gas industry is slowing down,” Jankowski said, “it will have an impact on Houston’s economy.”
Deloitte said that while CFOs across sectors tend to be more optimistic at the start of a year, the first quarter “bump” this time was the smallest since the first survey in 2010. “If this quarter is the high-point, it doesn’t bode well for the remaining quarters of the year,” said Greg Dickinson, director of the survey.
The report also says while CFOs are generally optimistic, “their near-term growth expectations are again weak.”
Horak said energy sector CFOs in particular offered more measured responses in the survey.
While oil and gas producers ramped up leasing activity and spending during the early days of the domestic energy boom, not all those projects have been as profitable as expected.
Because of the expenses associated with those technically challenging endeavors, companies are re-evaluating their portfolios as they sell assets they don’t think will have strong margins in the long-term.
Also weighing on the industry is uncertainty about the regulatory environment around such issues as hydraulic fracturing, emissions and rail safety, Horak said.
Brian Youngberg, an analyst with Edward Jones & Co., said energy sector executives face pressure from investors to rein in capital spending.
Data compiled by Raymond James & Associates found that next year, capital spending for the biggest U.S. producers probably will fall after several years of growth.
Raymond James research associate Justin Jenkins said energy companies in recent years focused on increasing their production – regardless of the cost – instead of focusing on developing production with the best profit margins.
Around $100
The result is that despite domestic crude prices hovering around $100 a barrel, earnings won’t be robust for some of the largest energy companies. Benchmark U.S. crude ended down $1.84 at $99.74 Tuesday.
“We’ve seen cost escalations,” Jenkins said, “and we’re seeing the impact of that.” He said that’s starting to change, with a growing number of companies shifting focus more toward profit margins than output and shedding assets that aren’t seen as essential.