2017 Energy Outlook

Upstream  Upstream

As with any commodity based business there are cycles, in this case the worldwide over supply of oil has resulted in significant price swings from approximately $100 per barrel in the third quarter of 2014 to below $30 in early 2016. The rebound above $50 per barrel can be attributed to supply rebalancing and the recent OPEC announcement to reduce output in 2017 to 32.5 billion barrels per day. In the event OPEC’s output agreement remains intact, we would anticipate oil prices to remain at or above $50.

The prolonged decrease in energy prices is causing financial distress for many upstream companies, especially those affected by the Notice to Lessees (NTL) issued this year by the Bureau of Ocean Energy Management (BOEM). These potentially paralyzing regulations will force companies to post supplemental surety bonds or other collateral to insure 100% of future plugging and abandonment (P&A) costs for OCS oil and gas properties.

Although BOEM claims the measure has been taken to protect U.S. taxpayers from having to pay decommissioning costs for bankrupt oil and gas companies, Opportune’s research shows that the NTL is an overreaching regulation that attempts to solve a non-existent problem.

Opportune released a cost-benefit analysis in response to regulatory changes proposed by BOEM that could financially harm many of the independent oil and gas operators in the Gulf’s outer continental shelf (OCS). While BOEM has since issued new orders in attempt to appease the industry’s growing discontentment, OCS operators will need more than a 6-month time extension and “Orders to Provide Additional Security” for sole liability properties to survive in a post-NTL 2016-NO1 regulatory world.

It is estimated that roughly 300 upstream companies filed for bankruptcy in 2016, and many management teams are curious about hedging alternatives during the restructuring and bankruptcy process. The implementation of an effective hedging program can be a tool that helps ensure certainty of cash flow and perhaps avoid having to file for bankruptcy.


Midstream fundamentals are widely believed to be guarded from commodity price volatility; however, no energy sector is spared from “lower for longer.” Midstream companies have largely remained out of forced restructuring through 2016 but are not out of the woods yet. In 2017, those that serve higher cost to drill basins are at the greatest risk of throughput volume declines and will face increasing pressure as MVC’s roll off.

Cost of capital remains challenging as we enter 2017. There is still plenty of money on the sidelines but buy/sell spreads have kept M&A activity to a minimum. While there has been some contraction in the number of private equity-backed midstream portfolio teams in the market bidding on what would be their cornerstone asset, it’s not likely enough to affect contraction on purchase price multiples this year. We have seen GP/LP roll ups and transitions to C-corps from some larger firms but the jury is still out on whether that defines a new trend that will carry over to 2017 or only proves strategic for a few.

With capital markets wavering and lack of new production coming online to drive growth in the sector, midstream companies are driven to look inward for margins. Right-sizing balance sheets and cost cutting initiatives took over 2016 while M&A hit the locker room. However, as commodity prices have recovered from their extreme lows of Q1 2016, upstream and midstream companies have started to review their risk policies and hedging programs to lock in margins. We are seeing an uptick in companies reviewing their marketing processes and information systems to identify internal optimization projects that provide low capital value additions to their bottom line for years to come.

At a time when companies are taking a hard look at cutting administrative head count, it is also a time when midstream companies are having to prepare for new revenue and lease accounting guidelines that go into effect in 2018. While the timing of recognizing revenue will likely not change, the disclosure requirements and accounting of TIK agreements will be significant.

Lease accounting changes could negatively affect debt ratios and there will also be significant changes to lease contract governance within organizations.

While the 2017 outlook for the midstream sector may remain unclear, it is a safe assumption that the sector will eventually follow wherever upstream takes it.


The downstream sector will be focused on reducing the gasoline supply overhang with a normal refinery turnaround and maintenance season, which should improve margins later into 2017. Absent the refined product inventory drawdown experienced in the fall of 2016, U.S. refiners would clearly be looking at a very tight market highlighted by stressed margins. The industry will also continue to battle the costs of regulatory compliance. RIN prices soared to record highs in 2016, with an estimated cost to the industry of $1.8B. While the rising compliance costs continue to plague independents, it serves to improve the major’s bottom lines. Final regulatory ruling on the Renewable Fuel Standards will be paramount to both.

As refined product exports continue to rise in 2017, dependency on these markets for product outlets increases, highlighting a potential weak point should demand fall. Refiners are accustomed to the margin cycles and how production rates and inventories impact markets.

The “golden era” of independent refiners may be waning, but opportunities to build and operate commercially successful downstream businesses are alive and well. The key is to operate efficiently, exploit vertical integration options and leverage scale when possible.

  Oilfield Services

While upstream companies are adjusting to the new normal of oil prices at or about $50/bbl, oilfield services (“OFS”) companies are trying to adjust as well. In 2014, worldwide upstream capital expenditures were estimated at $724 billion and the current forecast for 2017 is approximately $450 billion. Because of the decline in oil prices and associated capital expenditures, OFS companies have had significant layoffs, decline in profitability and, in some cases, been forced to declare bankruptcy. The situation has produced a sharp decline in the value of oilfield equipment causing many OFS companies to recognize impairments of their assets for financial reporting purposes.

There is expected improvement in 2017 with an increase in rig count and upstream capital spending; however, OFS companies will be under pressure from producers to limit price increases for equipment and services. If commodity prices move higher in 2017, OFS companies should experience growth along with margin improvement in the second half of the year. Overall, 2017 will continue to be a challenge for OFS companies, however, there is hope for improvement.

  Power & Gas

Generation will continue to face a challenging margin outlook in many areas as capacity prices are relatively low and as subsidized renewables make it even more challenging in some markets like CAISO. 2016 saw a significant increase in generation asset transactions that will likely continue in 2017.

Retail energy marketers will continue to face challenging margins with generally low market volatility which will continue the trends of testing new product offerings, sustained focus on operating efficiencies, and industry consolidation.

Domestically, more LNG plants are beginning to come online with more startups expected to come in the near-term. Given the scale of these plants’ demand and changing supply sources with shale production, major changes in gas pricing differentials and increased volatility are likely. Utilities will continue to pursue new strategies for growth (renewables, DER, gas/midstream, mergers/acquisitions) to offset flagging demand growth.

There will be continued evolution and uncertainty in the regulatory constructs – push for more deregulation (NV/MI), push for more regulation (NY), and post-election uncertainty around environmental regulations (CPP) and renewables.