Buddhists call it the middle way—a philosophy that navigates through the highs and lows of life and avoids extremes.

That might be dandy for people, but middle-market E&Ps are stuck. Oil prices appear to have stabilized at $50 per barrel (bbl). While that’s preferable to 2016’s low of $27/bbl, it’s also down from more than $100/bbl in 2014.

The middle market is suffering. Mid-cap companies are being squeezed, according to a BDO global study of more than 300 publicly traded, middle-market E&P companies in the U.S., Canada and elsewhere between fiscal years 2010 and 2015. This year, they are again expected to face profits (and losses), a lack of investor support and little help from modestly recovering prices.

The median market cap among middle-market oil and gas companies dropped 58% between 2014 and 2015, to $91 million from $219 million.

Historic price-earnings (PE) ratios took a hit as well, decreasing as abruptly as earnings. The median historic PE ratio fell to 6.4 this year, compared with 12.4 last year and an overall high of 25.6 in 2010.

BDO’s Global Energy Middle-market Monitor study found:

  • Median pre-tax income fell to a net loss of $30.2 million in 2015 compared with a net loss of $5.9 million in 2014;
  • Median revenue across all companies assessed fell to $67.6 million in 2015, down from $96.9 million in 2014; and
  • Median debt ratios grew by 25% year-over-year (yoy).

The report asks whether middle-market companies are “in over their heads?” as debt has increased.

“The middle market has been instrumental in the growth of the international energy sector, helping to decentralize the industry and spread the wealth well beyond OPEC to all corners of the globe,” said Charles Dewhurst, global leader of the natural resources industry group at BDO. “But the rapid growth we saw over the past decade was unlikely to last, and it appears that many may have lost sight of the energy industry’s susceptibility to boom and bust cycles. But now that the oil price downturn has checked our collective hubris, we are in a position to reorient, re-evaluate and rebuild.”

Stuck in the middle with crude

North American E&Ps have been hit hardest, highlighting the “pain of the price” that hit the global energy sector in 2015.

While revenue shrank by 30% globally, U.S. companies saw their revenues decline 41%, while Canadian companies’ revenues deteriorated by 44%. The U.K.’s companies saw a 4% revenue decrease and Australia remained stable from 2014 levels.

“The size of the industry in each region appears to have influenced the relative magnitude of the shifts in each country,” the report said.

Together, the U.S. and Canada produced about 18 MMboe/d in 2014, while the U.K. and Australia produced a fraction of that.

Left in the tank

Unsurprisingly, profits also nosedived. Canada and Australia saw the largest proportional drops in median pretax income. U.S.-listed companies posted the most substantial losses in terms of total dollars, with median pretax income declining $175.1 million from 2014, and pretax income decreasing by $133.2 million.

“However, these losses amounted to an approximately 400% decrease from 2014—the smallest proportion seen in this year’s study,” BDO’s report said.

Exploration, too, has been in hibernation, with more and more rigs mothballed as E&Ps abandoned drilling.

Globally, median exploration costs decreased significantly to $7.9 million in 2015, a 78% yoy decline. Canada saw the largest proportional drop in median exploration cost (89%), while the U.S. saw the smallest (8%).

Without exploratory drilling, the “rapid depletion of the unconventional assets common in North America” continues to drive fierce competition for new reserves, the report found.

The median reserve life in Canada dropped to 8.2 years in 2015 from 10.9 years in 2014, and the median in the U.S. dropped to 9.5 years from 13.7 years over the same time frame.

“The median North American reserve life, then, decreased by 4 years—from 13 years in 2014 to 9 years in 2015,” the report said. “We continue to see North American companies seek to add to their reserves. However, with cash flow dwindling and overall resources (labor, oilfield services) contracting, the rate of reserve additions has dropped sharply.”

The median reserve addition in 2015, including purchases, was 28 MMboe, down 94% from 2014. U.S. additions decreased by about 93%, while Canadian additions decreased by 64%.

Darren Barbee can be reached at dbarbee@hartenergy.com.