LL: After reviewing the 10-k's, what are the greatest threats to their businesses?
CD: The most pressing concerns, cited by all 100 companies, were the risks of regulatory changes and of rapidly changing oil and natural gas prices. To a degree, these risks go hand in hand as we have seen moves to reduce tax incentives presently offered to energy exploration companies during a time when we have seen rapidly rising oil and gas prices, and a perception that oil companies are making record profits.
LL: Let's break down the threats. How are they hedging the ongoing regulatory battles?
CD: The industry has done a good job of making its case that the inherent risks of searching for and drilling for oil warrant the special tax incentives that the industry receives. They have also been successful in highlighting that much of the oil and gas exploration is done by smaller entrepreneurial companies that need the tax incentives to fund the exploration. Carrying the banner on these messages has fallen largely to the American Petroleum Institute, the principal industry group. But the industry is also quite well connected with Senators and Representatives in Washington.
LL: The anti big oil sentiment is back after the high gasoline prices. Do they detail how prospective legislative changes could hamper growth?
CD: Yes. They make two points very strongly: First, that reduction or elimination of the tax incentives that the industry enjoys would make many exploration projects less viable. In this scenario fewer exploration projects would be undertaken, thus reducing growth within the industry and reducing the supply of oil and natural gas.
Second, more restrictive environmental regulations in areas such as deepwater drilling or governing the extraction of natural gas in the many U.S. shale formations, would drive up the cost for the industry in complying with additional government regulations. Such increased costs would make select projects less viable and some would be dropped entirely.
LL: With reserve replacement being a top concern, what kind of further color can you give?
CD: With natural gas and particularly, oil being finite resources, a company’s track record of replacing its oil and gas reserves has always been a key performance metric. Finding sizeable new oil reserves has become increasingly difficult in recent years whereas there have been significant major discoveries of natural gas, primarily in the various shale formations.
So in many cases, although companies have been successful in replacing total reserves from year to year, the balance between oil reserves and natural gas reserves is tipping more heavily on the side of natural gas for many E&P companies.
LL: Given the rig shortages, did the oil companies quantify the cost of drilling?
CD: The cost of drilling is not quantified in the risk factor sections of the 10K reports, and is not typically separately disclosed. The cost will vary widely depending on the size of company, location, and other factors.
LL: Based on all the filings, what is the headline?
CD: The biggest risks facing oil & gas companies are volatile oil and gas prices, and more costly government regulations graphic!!!
The following is a list of the top 20 Risk Factors cited by the 100 Largest U.S.E&P Companies: