Low oil prices will be the bane of industry executives in 2015, E&P decision makers say, presenting them with the challenge of staying financially healthy in a down market.

Nevertheless, large cap E&Ps remain better positioned for the lull than many investors believe, analysts said.

In many corners of the industry, pessimism has set in. Some companies plan to get leaner in 2015. However, some analysts say many large cap independents will weather the oil downturn in 2015 and turn a profit.

An open question is how acquisitions and divestitures (A&D) will fare after a stellar nine months began 2014. Companies say they will cut back on buying, though many tantalizing assets are available.

“It is hard to tell if we have hit the bottom with oil prices,” said Christopher Simon, managing director, head of acquisitions and divestitures, Raymond James. “I do expect a bit of a lull in A&D activity, but opportunistic buyers will be getting into the market. It will take a few months of stable prices to bring buyers and sellers back together.”

BDO’s 2015 Energy Outlook Survey found that swift declines in oil prices have rattled the industry, with 45% of CFOs expecting low prices to be their greatest financial challenge—a 55% increase in the number of CFOs expressing similar sentiments last year. WTI peaked at $102 this year. Crude prices had fallen to about $67 on Dec. 2.

“The past six months have seen the oil markets return to the volatility that has historically characterized the industry,” says Charles Dewhurst, partner and leader of the natural resources practice at BDO. “However, while headlines may be saying these price declines herald the end of the shale boom, U.S. companies have been preparing for a return to fluctuations and are well-equipped to navigate through this transitional period.”

BDO found that just 37% surveyed expect global crude demand to increase in 2015—a 43% drop from a year ago. BDO is a professional services firm providing assurance, tax, financial advisory and consulting services.

Futures

U.S. companies are girding themselves against future price free falls.

Nearly one-third of CFOs say that they will pursue cost reduction programs to improve value for stakeholders, while 56% say they will cut costs and seek efficiencies as they try to remain profitable in 2015.

Budgets should decline by about 15% in 2015, said Thomas R. Driscoll, managing director, Barclays.

If 2015 oil prices follow the current forward curve of about $70 per barrel for WTI, capital budgets will be set with cash flow and drilling economics at the head of the spear.

“Despite lower oil prices, we expect solid double digit oil volume growth in 2015 from many of the companies in our coverage universe,” he said. “The E&P companies have a set of unprecedented economic opportunities in onshore U.S. oil basins.”

The independents’ desire to drill will be determined by perceptions of intermediate-term oil prices of six to 24 months, rather than by spot prices, Driscoll said. Capital spending will decline in line in tandem with cash flows and production growth will slow somewhat for large cap independents, he said.

But some E&Ps are set to survive and thrive at oil prices below $75, a Dec. 2 Global Hunter Securities report said.

Of the 43 companies GHS scrutinized, 14 retained their buy-rating, said Mike Kelly, senior analyst.

They are: Continental Resources (NYSE: CLR), Carrizo Oil & Gas Inc. (NASDAQ: CRZO), Concho Resources Inc. (NYSE: CXO), Energy XXI (Bermuda) Ltd. (NASDAQ: EXXI), Diamondback Energy Inc. (NASDAQ: FANG), Noble Energy Inc. (NYSE: NBL), Gastar Exploration Ltd. (NASDAQ: GST), PDC Energy Inc. (NASDAQ: PDCE), PetroQuest Energy Inc. (NYSE: PQ), Ring Energy Inc. (NYSE MKT LLC: REI), RSP Permian Inc. (NYSE: RSPP), Sanchez Energy Corp. (NASDAQ:SN) and Cimarex Energy Co. (NYSE: XEC).

Kelly also tapped six stocks to sell.

A&D’s Fate

Even as oil prices began to falter in 2014, A&D activity continued to soar. Transactions in the third quarter totaled $10.5 billion.

Tudor, Pickering, Holt & Co. said in a Nov. 28 report it expects little activity in the next few months while prices settle and the difference between bids and asking prices narrow.

“However, demand remains high for quality assets,” the firm wrote. “Permian acreage packages are a key focus as management teams may work to bolt on and backfill longer term drilling programs.”

The Eagle Ford and Niobrara may be active at the corporate level as pure plays could become attractive consolidation candidates.

Tudor said it expects large caps to use balance sheet flexibility, but wouldn't be surprised if smaller cap Permian and Marcellus focused companies consolidate. Obviously it will be deal dependent, but the firm thinks this pullback may provide a great buying opportunity given the positive long-term crude view.

Raymond James quarterly A&D report said 2014 has been an active year for U.S. E&P M&A onshore asset transactions.

One area of interest is natural gas.

After declining for months, gas-weighted transactions exceeded oil-weighted transactions in the third quarter, led by majors and large caps shedding noncore gas assets.

The quarter saw 16 gas deals valued at $6 billion versus 24 oil transactions valued at $4.5 billion.

Simon noted that “dry gas is getting more attention.”

CFOs are more optimistic about natural gas, but remain wary, BDO reported. CFOs, in general, expect natural gas production to grow in 2015.

Nearly two-thirds of CFOs expect the domestic supply of natural gas to increase in the coming year, while the majority expects both global and domestic demand to increase as well.

No respondents said they expected demand to decrease in 2015.

CFOs remain hopeful that LNG will foster future growth, with 69% anticipating that exports will increase. About 44% of companies say they expect to increase their investment in LNG processing.

Geographically, the most active areas were the Gulf Coast/South Texas—including the Eagle Ford—followed by the Rockies and the Permian Basin.

In the South Texas/Gulf Coast region, $8.79 billion in asset transactions have been executed in 2014. On average, deals were worth $440 million. Transaction activity picked up in the third quarter with eight of the 20 transactions occurring since July 1, according to Raymond James.

The largest transaction was Encana Corp.’s (NYSE, TSE: ECA) purchase of Freeport-McMoRan Copper & Gold Inc.’s (NYSE: FCX) Eagle Ford properties in Karnes, Atascosa and Wilson counties, Texas, for $3.1 billion.