Ernst And Young Oil and Gas Outlook Shows a More Stable Environment

Christina Broder, Big4.com Staff Reporter

Ernst And Young Oil and Gas Outlook Shows a More Stable Environment

Ernst & Young s Americas Oil & Gas Center finds that that oil and gas industry fundamentals are improving in line with the global economy. Developing countries are ahead of advanced countries on growth, but there are positive indicators throughout the globe. Energy market sentiment remains relatively positive with generally rising economic expectations. This is evident by the current price of oil hovered around $80 per barrel in quite a stable manner. This price level seems to be supported by demand from emerging countries, coupled with a sense of satisfaction from OPEC producers.

According to Marcela Donadio, Ernst & Young LLP, Americas Oil and Gas Leader, “The markets are coming back into balance. The industry, in particular oilfield service companies, is cautiously optimistic about the proposed steps to open sections of the outer continental shelf to oil and gas exploration.”

Here are some highlights by each energy industry sub-sector:

Oil
Most oil analysts are seeing that the market is coming into balance this year. There is ample spare capacity to meet increases in demand. Prices are steadily increasing at a comfortable pace over Q1-2010 and this trend will continue as demand grows. However, at over $80 per barrel, and a recovering economy, there may be a tipping point – where high oil prices may actually work in reverse – and negatively impact manufacturers and consumers and slow economic recovery.

Natural gas
There was a short-lived upswing in NG price last quarter during the cold winter months. But prices have since come down as shale gas production continues to increase despite relatively low prices and weak demand. In such a scenario, incentives for pulling liquids out of the gas stream have increased dramatically. But, “The long term outlook for natural gas is very strong, particularly in the unconventional plays and producers are moving forward,” said Donadio.

Downstream
After a long time, there is some improvement in refining margins, but spare capacity remains and refiners will have to keep capacity shut down and may even have to consider closing more capacity. Oil demand is slowly returning but is unlikely to return to pre-2008 levels as consumption levels have shifted. Companies are continuing to make their refining assets much more efficient.

Oilfield services
Finally, exploration and production spending are going down to oilfield services’ sales and bottom lines. Rig counts increased this past quarter due mainly to growth in horizontal drilling, with a positive trend likely to continue into Q2-2010.

Transactions
This activity was reasonably strong in Q1-2010, exceeding $70 billion in deal value (notably Exxon buying XTO). While global financial crisis is still affecting deal flow, there is evidence of loosening in capital markets. While there are fewer deals made, they have been greater in value than recent quarters. Jon McCarter, Ernst & Young LLP, Transaction Advisory Services Leader, Americas Oil & Gas Center says, “Activity is starting to increase in the deal markets.”