The energy industry has been buffeted by substantial changes in recent years in uncertain economic conditions.
Nonetheless, investors’ views of the industry are improving, according to Grant Thornton professionals and other experts who presented at the firm’s recent 2022 Energy Symposium.
Energy industry leaders are working to navigate recent trends that include:
- Challenging economic circumstances that demand fiscal discipline and pursuit of mergers or divestitures that drive efficiency and create new opportunities.
- New environmental, social and governance (ESG) initiatives and reporting requirements.
- Increasing cybersecurity threats in a world that has become increasingly digital.
- An evolving regulatory landscape.
- A difficulty attracting and retaining talented workers.
Here’s what Grant Thornton professionals and energy industry leaders have to say about capital management, ESG, cybersecurity, regulatory compliance and workforce development in the energy sector.
Capital management is paramount
“Despite supply chain disruptions, unprecedented inflation, global economic uncertainty and tightening resources, the investment community’s views toward E&P have become more favorable, likely due in part to entities distributing earnings to investors for the last several years while maintaining cash flows from operations,” said Hilary Penrod, Partner and Professional Practice Director. “With increasing demand from investors for clean energy, zero-emissions targets and new proposed regulatory reporting requirements, we can expect entities to diversify their operations and increase strategic acquisitions and divestitures with a relentless focus on earnings, capital spend, return on capital investments, and forward-looking budgeting to be at the forefront of energy industry leaders’ decisions. Resilience is this industry’s greatest strength, and the best is yet to come.”
“The investment community’s views toward E&P have become more favorable, likely due in part to entities distributing earnings to investors for the last several years.”
- New regulatory pressures have increased the necessity of instituting strong capital discipline. Large energy companies have the infrastructure in place to be conservative with capital, but smaller companies with lean staffing might burn through significant cash paying third parties to implement complicated new regulations. This may lead them to explore consolidation.
- Energy companies may need to complete acquisitions to improve capital efficiency as well as to develop new capabilities that will generate stronger returns. M&A activity is attractive but also challenging as the highly volatile commodities pricing environment makes it difficult for buyers and sellers to agree on a value.
- For traditional energy companies, these short-term considerations need to be balanced with attention to the long-term issue of how to transition their businesses to a low-carbon economy in the 2030s and 2040s. Arriving at strategies for this evolution will be challenging for many companies as they consider how and where to invest in their future.
ESG takes center stage
“Investors, customers and potential employees are looking at environmental, social and governance (ESG) as a differentiator,” said John Friedman, Managing Director, ESG & Sustainability Services. “While the focus is on ensuring compliance with evolving requirements and regulations, that alone with not set you apart from your competition for investment dollars, customers and potential employees. Looking at your own data, combined with a peer assessment, can offer insights as to areas where you can, and should, communicate what makes you different.”
“Looking at your own data, combined with a peer assessment, can offer insights as to areas where you can, and should communicate what makes you different.”
- Energy is the only industry with its own sustainable development goal. That goal includes increasing access to affordable and reliable energy while looking to modernize. Failing to communicate what you are doing and doing well puts you at a disadvantage compared with companies that are more proactive in their outreach.
- While climate change and reducing greenhouse gas emissions is a strong focus of attention, energy companies should focus on and communicate many of the things that matter to their stakeholders, including reducing pollution, focusing on safety and reliability and guarding against cyberattacks.
- Transparent, reliable, and comparable information has always mattered to investors, and climate-related disclosures are no different. The SEC responded to this importance and disparity among reported information in March 2022 with new proposed rules for climate disclosures. A final rule is expected to be issued in the coming months.
- The SEC’s requirements are likely to require disclosure, which will put pressure on energy companies to provide information directly to the SEC and their customers. Putting data collection and analysis systems in place sooner, rather than later, will help companies prepare and be ready for “investor-grade” data requirements.
- Increased climate-related reporting requirements create the need for increased governance oversight, management responsibilities and, unfortunately, potential new opportunities for fraudulent financial reporting.
Cybersecurity efforts focus on resilience
“Increased sophistication and commoditization in cybercriminal markets have led to a proliferation of attacks in recent years,” said Johnny Lee, National Practice Leader — Forensic Technology. “This phenomenon has been exacerbated by the lower security posture of the work-from-home regimes caused by the pandemic, the advent of cryptocurrencies (used in ransomware payments), and the relative safety with which some of these criminal actors operate in certain parts of the world.
“Increased sophistication and commoditization in cybercriminal markets have led to a proliferation of attacks in recent years.”
- Organizational readiness is key to business resilience. More specifically, energy organizations who treat cybersecurity like a category of enterprise risk (as opposed to strictly an IT phenomenon) are eminently better prepared to recover from cyber-attacks. This is because enterprise risk preparedness introduces key concepts of multi-disciplinary teams and the regular practice of critical incident response protocols — both of which are required to bounce back from a cyber incident.
- The second component of business resilience focuses on identifying the required niche expertise that is not present within your employee base. Once these specialists are identified (e.g., outside counsel, forensic experts), getting them plugged into proactive planning and practice exercises increases your resilience quotient dramatically.
- The third component of an effective business resilience strategy consists of cyberinsurance coverage. Engaging with a qualified cyberinsurance broker is a key takeaway, both for fit and function — at time of policy selection/renewal AND for assistance during an actual incident. Despite recent dramatic increases in insurance premiums, cyberinsurance remains a critical component of effective business resilience.
New regulations are coming
“Traditional oil and gas companies are experiencing the effect of various factors impacting their business which may not have been significant in the past 20 years,” said Michael Osina, Tax Partner, Tax Energy Industry Leader. “These impacts include the changing atmosphere around new financial reporting regulations, new tax legislation, possible cash taxes and a shifting focus on the renewable energy sector. All of these areas will likely have a significant influence on where the energy industry goes over the next several years.”
“Traditional oil and gas companies are experiencing the effect of various factors impacting their business which may not have been significant in the past 20 years.”
- SEC filers should be aware and proactive on recently proposed SEC rules, including those related to cybersecurity and special purpose acquisition companies (SPACs) as well as the climate disclosure proposals.
- Corporate taxpayers should be paying attention and planning for tax issues around interest expense and NOL limitations and their impact on both cash taxes and financial statement reporting.
- Companies in the energy industry should be aware that the new Inflation Reduction Act has provisions in the legislation that affect the renewable energy sector as well as the traditional fossil fuel sectors.
Workforce challenges continue
“The human capital and talent management environment is easily one of the top issues that all energy companies will have to confront over the next several years, said Eric Gonzaga, National Managing Partner, Human Capital Services. “With the dynamic economy, continued demand in both recruitment and retention, and the expanded influence of today’s new workforce members, energy companies simply need to ensure that they have an engaged workforce that is aligned with the mission and strategy. This engagement certainly requires competitive compensation and benefits as table stakes. However, going forward, organizations need to create a culture and employee value proposition that is distinct and inspiring, or run the risk of continued human capital challenges.”
“[Energy companies] need to create a culture and employee value proposition that is distinct and inspiring, or run the risk of continued human capital challenges.”
- Recruitment and retention continue to be challenges going forward, despite the slowdown in the economy.
- Pay inflation is still expected to be above pre-pandemic standards, albeit lower than in the last two years.
- Organizations have moved from simply “paying more for all” to identifying priority areas with which to be aggressive, while also reviewing the efficiency of current pay programs.
- Additionally, firms are implementing non-pay investments, focused on culture, employee engagement and workforce efficiency, with the goal of creating a sustainable work environment.
Developing successful strategies in all these areas — capital management, ESG, cybersecurity, regulatory compliance and workforce management — will be a critical imperative as energy leaders seek a competitive edge in a challenging economic climate.
Global Valuation Co-Head
U.S. National Managing Partner, Energy
Bryan Benoit is a partner in the US Strategy and Transactions practice and the Global Valuation Co-Leader. Further, he is a principal in Grant Thornton Financial Advisors LLC, providing fairness opinions and other board services. In addition, he serves as the US National Managing Partner, Energy.
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Managing Director, ESG & Sustainability Services
John Friedman is a managing director in Grant Thornton LLP’s Environmental, Social and Governance (ESG) and Sustainability practice, based in the firm’s Arlington, Virginia office.
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National Managing Principal, Human Capital Services Practice Leader
Eric Gonzaga is a Principal and practice leader for the Human Capital Services (HCS) group in Minneapolis.
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Principal, Advisory Services
Johnny Lee is a Principal in the Forensic Advisory practice and the National Practice Leader of the Forensic Technology practice.
Partner, Tax Services
Michael Osina is a partner in Grant Thornton’s Tax Services practice with an emphasis in the oil and gas industry. He has 13 years of experience providing tax services, focusing much of his time on ASC 740 issues. He previously worked at Andersen and Deloitte.
Hilary is a Partner at Grant Thornton, a leading global professional services firm that provides audit, tax and advisory services. With more than 50,000 people in more than 135 countries, Grant Thornton is one of the largest professional services firms in the world.
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