Grant Thornton's annual survey of upstream U.S. energy companies finds that commodity-prices uncertainty still plagues the industry, even though many respondents see growth ahead.

Uncertainty regarding the direction of natural gas and crude oil prices remains the primary concern of the industry for the second consecutive year, based on more than 200 upstream respondents to the 11th annual survey conducted by Grant Thornton LLP, in cooperation with Oil and Gas Investor and Hart Energy Institutional Research.

The commodity price outlook varied among respondents by a wide margin, however. With energy price volatility continuing to hinder the industry, fewer respondents expect an increase in capital expenditures during 2013.

Employment levels still appear encouraging for the energy industry, as more than half of the survey’s respondents expect employment to rise for the remainder of 2013. Yet, the expected rate of increase is down from the previous two years. Following are more details about these topics.

Threats and opportunities

Respondents continue to wrestle with the impact of unpredictable oil and gas prices. Furthermore, they said persistent cost issues are frustrating their capital-spending decisions. As with 2012, volatility has led to a reliance on hedging production as insurance against price fluctuations. For both 2013 and 2014, the majority of respondents indicated that more than 50% of their oil and gas production would be hedged.

Uncertain oil and gas prices remain the most significant threats to company value, followed by the difficulty of obtaining capital. Eighteen percent of respondents said uncertain oil prices were the most critical problem, followed by 16% who pointed to uncertain natural gas prices. In the 2012 survey, availability of a skilled technical staff was seen as the thirdbiggest problem, but this factor dropped to eighth in 2013, replaced by regulatory requirements in third place.

Rounding out the possible threats, in order of importance, are: access to enough acreage, legislative initiatives, environmental concerns, competition with larger companies, access to midstream infrastructure, litigation and other concerns.

Successful exploration and acquisition of key acreage positions topped respondents’ list of factors with the greatest potential for enhancing company value, followed closely by mergers and/or acquisitions. Exploration was also at the top of the list in the 2012 survey. Meanwhile, price risk management, asset sales, capital infusion and retaining/attracting people were considered less important (in that order).

Private-equity funding and debt instruments were the most prevalent tools used in 2012 and 2013 for accessing capital. Respondents indicated joint ventures would become more common, with 49% indicating use of that strategy in 2013 compared to 35% in 2012. More companies are looking to form a joint venture to help cover costs of production.

Slower economic growth; more oil supply

Three years after the Great Recession, the global economy is still struggling, Grant Thornton said. While 2010 delivered real gross domestic product (GDP) growth of 4.5%, the above-trend-line growth was achieved because of a low base, owing to the 2009 deep contraction and extraordinary fiscal and monetary stimuli that followed the steep decline in global output. Fiscal stimulus has been off the table in most advanced countries because of debt overhang, and slower-than-expected job creation hasn’t provided a base of government revenue growth to restock coffers or pay down debt.

Simply put, the past two years of belowtrend- line growth can be considered payback for the outsize growth in 2010, Grant Thornton said.

Slower-than-forecasted economic growth will also affect crude oil and refined product demand, which has been expanding at a slower pace than GDP growth.

While petroleum demand isn’t necessarily growing, increased volumes of crude oil are hitting the market, from Iraqi crude oil to North American light, tight oil. The bottom line: Non-OPEC supplies of crude oil are growing almost as fast as global oil demand.

Oil prices are thus expected to remain muted over the next three years.

M&A activities led the way in deal flow in 2012. Joint ventures are also set to impact the industry in 2013 as they did in 2012.

Private-equity firms were active buyers in the energy market in 2012 and they will remain busy in 2013. Strategic asset sales from midcap operators will also dot the landscape in 2013, as slowly recovering natural gas prices and double-digit oil prices force companies to rebalance asset sheets, the survey indicated.

Oil and gas price expectations

Survey respondents showed a wide divergence in views regarding natural gas prices: The low and high estimates for 2013 gas prices varied by nearly $2.50 per thousand cubic feet, and this gap grows to almost $6 per thousand cubic feet by 2015. Yet, on average, gas prices are expected to increase over the survey period.

Oil price predictions also vary significantly from the minimum to maximum prices suggested by respondents, but not to the same degree as gas prices. The average oil price is expected to be more or less stable over the next three years, according to respondents.

They said they do not expect gas prices to average more than $4 per thousand cubic feet over a calendar year until 2015. In the 2013 survey, respondents estimated the average gas price for 2013 to be $3.48, rising slightly to about $3.77 in 2014 and reaching $4.09 in 2015.

Expectations for rising crude oil prices have also been pared back when comparing the 2012 and 2013 surveys. Average crude oil prices for 2013 were expected to remain close to $85 per barrel, rising marginally each year. In the 2012 survey, however, crude oil prices were expected to top $100 per barrel by 2014. Obviously, the success of rising light, tight oil production in North America has reduced expectations of price inflation.

The price at which survey respondents would expect oil-directed drilling to decline on average was $69.84 per barrel. This is significantly lower than the average price for oil in 2013 through 2015, and lower than most shale breakeven prices, as indicated in Hart Energy’s North American Shale Quarterly.

Labor market tightening?

More than 50% of respondents said industry growth is inevitable. This is, however, a marked decrease from last year’s 71% of participants who indicated the industry’s overall level of employment would escalate. Respondents also predicted that employment growth will be better in 2014 than 2013.

On the subject of recruitment and retention, this year’s study found that the labor market may be looser in 2013. Sixty-eight percent of respondents don’t expect to encounter any difficulties in hiring and retaining employees (an increase from 45% in last year’s survey).

For the past two years, an identical proportion of respondents (57%) indicated they do not expect geologists, engineers, or other professionals’ compensation to significantly increase (more than 10%). Hence, expectations for wage inflation are somewhat muted.

About the survey:

This is the 11th annual survey of upstream U.S. energy companies, commissioned by Grant Thornton LLP in partnership with Hart Energy. The survey was conducted via Internet from February through March 2013. Responses were received from more than 200 senior executives of independent E&P companies.

Issues explored in the survey were identified by seasoned professionals from Grant Thornton’s energy practice and Hart Energy Institutional Research.

While the majority of this year’s respondents came from E&P companies, this year’s survey also included an additional category, capital providers, which accounted for 5% of the participants.

One of the most significant changes in survey responses year-over-year is the increase in company size as measured by total assets.

Respondents indicated that their average total assets at the end of fiscal 2011 were approximately $1.6 billion. When surveyed this year, they indicated that the average total assets at the end of 2012 were approximately $4.7 billion, a significant rise.

For more, see grantthornton.com.