2017 will be a better year for oil and gas producers, a Deloitte executive predicted, but the industry's optimism is tempered by the hard lessons learned over the past two years.
One of those lessons was about debt loads.
"I think people have gotten a lot more financial discipline," Deloitte Vice Chairman and U.S. Oil & Gas leader John England said in an interview. "There was a lot of debt out there, and producers were chasing growth pretty significantly. You probably won't see as high debt levels, and there will probably be more focus on returns than growth."
In his outlook for 2017, England said the industry is slowly regaining confidence after commodities bottomed out in the early days of the year. Now, with oil and gas prices stabilizing, producers are feeling a little better. England said he expects companies to take an approach to 2017 that shows "cautious optimism."
"It'll be a slow road back," he said. "People will cautiously start re-investing in the industry. Rig counts will go up somewhat, and we'll probably see some growth in U.S. production and a healthier environment for the industry. But I don't see a huge bounce [in production]."
One reason a huge bounce in production is unlikely is the shape of the oil-field services sector, which was gutted by layoffs and deep budget cuts during the two-year price collapse. England said that segment will need time to recover. "One of the legacies [of the downturn] is the people side of it," he said. "I don't think production could ramp up very fast because there are some capital constraints. The debt capital will not flow back as fast as it did, and human capital will be constrained because it will take some time to get back into the industry."
England said the long-awaited rush of M&A activity appears to be beginning, with major deals in the oil-field services sector and a number of large-scale asset purchases in unconventional plays over the past few months. As the ask-bid split between buyers and sellers has diminished, moves are finally getting made.
"We've started seeing some uptick in some big deals, especially in the services sector. There's still room for consolidation on the services side and maybe the upstream side," England said. "I think you'll see people continuing to refine their portfolios, so we'll probably see more asset deals. It's tough to get deals done when there's differing views on price, and now they're coming together."