Striking a Balance: Ernst & Young's Quarterly Oil and Gas Outlook Shows a More Stable Environment Across All Sectors

HOUSTON, April 21 /PRNewswire/ -- Oil and gas industry fundamentals are improving in stride with the global economy. Developing countries continue to outpace the advanced countries in terms of growth, with positive indicators throughout the globe. With generally rising economic expectations, energy market sentiment remains relatively positive.

"The markets are coming back into balance. The industry, in particular oilfield service companies, is cautiously optimistic about the proposed steps to open sections of the outer continental shelf to oil and gas exploration," said Marcela Donadio, Ernst & Young LLP, Americas Oil and Gas Leader. "However, the environment could change significantly with the passage of new energy policy legislation or setbacks in the global economic recovery."

Oil

Most analysts see the market coming into balance this year, with ample spare capacity to meet increases in demand. Prices steadily increased at a comfortable pace over the past quarter and this trend will continue as demand grows.

However, with prices over $80 per barrel, and a recovering economy, concerns are being raised with respect to a tipping point – where high oil prices may negatively impact manufacturers and consumers and slow economic recovery.

Natural gas

The natural gas industry enjoyed a short-lived uptick in commodity price last quarter, during the cold winter months. Prices have since retreated as shale gas production has continued to expand, despite relatively low prices and weak demand. In this environment, the incentives for pulling liquids out of the gas stream have increased dramatically.

"The long term outlook for natural gas is very strong, particularly in the unconventional plays and producers are moving forward," said Donadio. "The potential upside is attracting the larger, financially stronger international companies, and will have substantial implications for natural gas and energy strategies."

Notably, the Environmental Protection Agency (EPA) recently announced a comprehensive study of hydraulic fracturing.

Downstream

For the first time in several quarters, there is some improvement in refining margins. However, spare capacity remains and refiners will have to keep capacity shuttered and may even have to consider shutting in additional capacity. Oil demand is slowly returning but is unlikely to return to pre-2008 levels as consumption levels have shifted. Companies are continuing to rationalize their refining assets.

Oilfield services

(see data graphs in news release at: http://www.ey.com/US/en/Newsroom/News-releases)

Continued increases in exploration and production spending are trickling down to oilfield services' bottom line. The past quarter witnessed improvements in rig counts, largely as a result of growth in horizontal drilling. This positive trend is likely to continue into Q2.

Transactions

Transaction activity was reasonably strong in the first quarter of 2010, surpassing $70 billion in deal value. While the global financial crisis is still impacting deal flow, there is evidence of loosening in capital markets. While there are fewer deals made, they have been greater in value than recent quarters.

"Activity is starting to increase in the deal markets. And we can expect to see more activity in unconventional shale plays and consolidation in the oilfield services segment," said Jon McCarter, Ernst & Young LLP, Transaction Advisory Services Leader, Americas Oil & Gas Center.

About Ernst & Young's Americas Oil & Gas Center

The oil and gas industry is faced with complex issues and constant change. Volatile prices, business consolidation, difficult operating environments, ever-increasing customer demand, continuously evolving regulatory environments and the reliability of supply all present significant challenges. The Ernst & Young Americas Oil & Gas Center (ey.com/us/oilandgas) can draw upon a network of Ernst & Young energy professionals in the Americas and around the world to work closely with clients to facilitate the development of coordinated approaches to managing risk, improving performance and increasing operational effectiveness. The Center works to anticipate market trends, identify the implications of and develop points of view on relevant industry issues. Our deep energy industry focus helps Ernst & Young make a difference.

About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

For more information, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. This news release has been issued by Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited located in the US.

SOURCE Ernst & Young LLP

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