by Charles Dewhurst

It has been a bumpy road for E&P companies this past year, and more dips and curves lie ahead in 2010. The recession will to continue to have a negative impact on demand for oil and gas at least until 2011, according to more than half of CFOs at oil and gas E&P companies in a survey my firm conducted last month.

But the situation isn’t all gloom and doom. While 45 percent believe access to credit won’t improve at least until 2011, another 40 percent say conditions will improve in the second half of next year. Capital access will remain a top financial challenge for CFOs next year, but it seems the situation is easing a bit. The promising news: almost half (47%) report banking relationships remain very strong. Only 19 percent say those relationships are strained, indicating most companies will be in a good position to bounce back when the environment turns around. Although most say capital spending budgets won’t get back to 2007 levels until 2011 or beyond.

Energy Policy Woes

A top financial concern weighing on the minds of CFOs for the year ahead: legislative changes. There is an air of skepticism about the Obama administration’s energy policies, especially with regards to cap and trade legislation and proposals to eliminate certain tax incentives. The U.N. Framework Conference on Climate Change taking place right now will put further pressure on the U.S. to push these legislative initiatives forward more quickly. But there are questions about how much weight it will really hold or its impact. Meanwhile, cities such as New York are passing legislation aimed at cutting greenhouse gas emissions and looking to impose energy audits every ten years for buildings bigger than 50,000 square feet to make ‘environmental tune-ups.’ If other cities follow suit, the impact could be greater than originally thought for oil and gas companies not involved in alternative energy.

Financial Challenges

Oil/gas E&P project delays increased during 2009 – 57 percent of CFOs we surveyed say they hits delays or terminated projects completely, compared with 26 percent at this time last year. The main culprits were poor project economics, lack of capital and equipment shortages or delays. The cost of oil field service production and equipment was also cited by more CFOs this year as their biggest financial challenge (9 percent versus 2 percent last year).

Low energy prices, particularly for natural gas, present another major financial challenge for 2010. This will likely lead to less drilling activity, particularly in the non-conventional shale plays. However, the hope is that lower prices will stimulate world demand for energy and help to pull us out of recession.

As executives work to pull through the rough patch, shareholder eyes are on executive compensation, where scrutiny will continue to ratchet up. Legislative initiatives will put more pressure on companies to eliminate excess. The SEC is expected to announce soon additional details on compensation risk assessment discussions in proxy statements. Our survey found that the industry has been making progress on this front – more companies are tying exec comp programs more closely to performance, and reducing or eliminating executive benefits like SERPs.

So, will there be a return to normal in 2010? Probably not, but conditions are starting to clear.

Charles Dewhurst, a partner and National Energy Industry Practice Leader at BDO Seidman LLP