HOUSTON — 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 released by the consulting firm Deloitte.
Despite a U.S. energy boom, energy executives forecasted the second-lowest sales growth and domestic personnel growth of any industry in the study.
Deloitte surveyed more 109 CFOs from some of North America’s largest companies, most of which are publicly traded and have annual revenues above $1 billion. The quarterly survey included 13 energy industry CFOs, but Deloitte doesn’t disclose their names or companies.
The findings contrast with the recent surge in U.S. oil and gas production. But Paul Horak, U.S. audit leader for oil and gas at Deloitte, notes that energy companies are faced with low natural gas prices and flat oil prices 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 forecasted earnings growth of 4.1 percent this year, less than any other sector. Their sales growth outlook of 1.9 percent was the second-worst. And the energy executives believe industry payrolls will decline 0.3 percent in the U.S., while most other executives surveyed planned on adding staff.
More broadly, the study’s authors said that while CFOs across sectors tend to be more optimistic about things like earnings, hiring and spending at the start of the year, the first-quarter “bump” this time was the smallest its ever been in the survey’s four-year history.
“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 (and) there are again rising signs of conservatism and tentativeness.”
Dickinson said those results suggest there’s a sense among CFOs that the country’s economic turnaround is not happening as fast as it should be.
“Every time we expect it to be right around the corner and it isn’t, expectations come down,” Dickinson said.
Horak said the energy sector, in particular, is showing a more measured response to the survey. While oil and gas producers ramped up leasing activity and spending during the early days of the domestic energy boom, not all of those projects have been as profitable or were completed as quickly as they were expected to be.
Because of the big expenses associated with those technically challenging endeavors, companies across the sector are re-evaluating their portfolios and selling assets they don’t think will have strong margins in the long-term.
Some also are signaling more muted earnings forecasts. Meanwhile, regulatory uncertainty about hydraulic fracturing, emissions standards, rail safety and other key issues is weighing heavily on the industry, Horak said.
Justin Jenkins, a research associate at Raymond James & Associates, said energy companies in recent years focused on increasing production — regardless of the cost — instead of targeting the best profit margins.
“The largest projects … have become more costly than they have been in the past,” Jenkins said, leading to lackluster earnings for some of the major energy companies.
Increasingly, energy sector executives are facing pressure from investors to rein in capital spending, said Brian Youngberg, an analyst with Edward Jones & Co.
Data compiled by Raymond James & Associates found that capital spending for the biggest U.S. producers likely will fall next year after several years of growth. For international producers, capital spending likely peaked last year, according to the company’s analysis.
Further, a growing number of companies are shifting focus more toward profit margins than output and shedding assets that aren’t seen as essential to their core mission as part of a “shrink-to-grow” strategy, Jenkins aid.
The survey found that energy industry CFOs, in particular, seem more biased now toward “limiting risk” as opposed to “pursuing opportunity,” and are more likely to prioritize contraction rather than growth. Twenty-three percent of energy CFOs surveyed expect a “substantial divestiture” this year.
That shift in focus already is playing out, thought different companies have unique approaches. Shell announced earlier this year it would slash upstream spending in North America and South America by 20 percent in response to disappointing results in U.S. shale plays. On the other hand, Apache is betting big on its domestic plays and selling off assets in the Gulf of Mexico, Egypt and elsewhere.
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