RECOVERY IS FRAGILE
Global economic activity has broadly strengthened since the second half of 2013. Recovery continues, but remains uneven. Cautious economic optimism among oil and gas companies is reshaping the business landscape.
In April, the International Monetary Fund published its updated World Economic Outlook (WEO). The authoritative outlook forecasts the global economy will expand 3.6% in 2014 and 3.9% in 2015. This is up from 3% in 2013.
Much of the impetus is coming from advancing economies. The recession in Europe appears to be over. The US recovery seems solidly grounded. Fiscal consolidation is slowing as acute risk of debt sustainability has diminished. Banks are gradually becoming stronger. The normalization of monetary policy (e.g. halting quantitative easing) is now on the agenda.
But risks have not disappeared. "The global recovery is still fragile despite improved prospects, and significant downside risks—both old and new—remain," the WEO said. These risks include possible slow-down of emerging economies, sustaining structural difficulties in the Euro-zone, recently emerging geopolitical risks, and others.
Also in April, Ernst & Young (E&Y) released the results of its 10th Global Capital Confidence Barometer survey. This biannual survey, conducted by the Economist Intelligence Unit, gauges corporate confidence in the economic outlook and identifies boardroom trends. The current findings are based on a panel of more than 1,600 executives in 54 countries surveyed in March, including 145 oil and gas executives.
The survey shows that oil and gas companies are a bit more cautious in their optimism on the global economic outlook than they were 6 months ago.
According to the survey, more than 54% of the oil and gas company respondents believe the global economic situation is improving, but that majority is sharply less than 71% it was in October 2013. But there also has been a corresponding increase in the number of companies that view the economy as stable, from 18% to 37%. Notably, oil and gas companies are slightly less optimistic than the broader global sample of respondents.
When asked to project the greatest economic risks to business over the next 6-12 months, about 36% of the oil and gas company respondents saw increasing global political instability as the No. 1 risk.
Slower emerging markets and the negative impacts of the phase–out of the US Federal Reserves' bond-buying and stimulus program are the other two major economic concerns of oil and gas companies, standing at 26% and 21%, respectively.
Meanwhile, confidence is rising across most key financial indicators for the oil and gas company respondents. These indicators include corporate earnings, equity valuations and stock market outlook, and short-term market stability.
A different path
Economic caution is reflected in job creation prospects and growth strategies. Combined with a new conservative consensus in oil and gas prices and relentless pressure on capital efficiency, this is driving a greater emphasis on optimization vs. growth, according to Andy Brogan, global oil and gas leader at E&Y transaction advisory services and the survey's coordinator.
While 86% of the oil and gas company responders expect to increase the number of jobs or maintain their current workforce over the next year, this represents a decline from 94% in the October 2013 survey. More critically, the portion of respondents expecting to increase jobs declined from 57% in October to 37% in April.
In the October 2013, almost 66% of all oil and gas respondents saw growth as their primary focus. But in the most-recent survey 6 months since then, companies have pulled back and become more focused on the fundamentals and particularly on cutting costs and improving operational efficiency, which rose sharply from 28% half a year earlier to 40%. The focus on growth, in contrast, declined to 39%.
On the oil and gas capital agenda, "optimizing" capital has replaced "investing" capital as the dominant dimension, increasing from 28% in October to 51% in April. Also, in keeping with their more cautious and conservative outlook, the oil and gas respondents are shying away from ambitious, transformational deals and looking to deliver growth organically.
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