Canada

Generating much-needed cash flow in the energy sector

INSIGHT ARTICLE  | 

Energy companies are increasingly focused on alternatives to normal business operations for generating cash flow during a potential liquidity crisis. Reducing inventory levels (and selling at below-market values), lowering capital spending, reducing full- and part-time staff, and decreasing selling, and general and administrative expenses could all be necessary for survival during this challenging time. While these actions have the potential to diminish the value and long-term viability of any business, there are ways to minimize the impact in the energy sector.

Maximizing cash flow

  • Investigate all stimulus, credit and incentive programs available:

1. The Alberta government has provided economic relief to the energy industry through extensions for oil and gas tenures, funding for the Alberta Energy Regulator levy and a loan to the Orphan Well Association; more information available here.

2. The federal government has announced that they are in the process of formulating an aid package for the energy sector, specifically, in addition to the programs and credits that have been made available to businesses in general to assist with the COVID-19 pandemic.

  • Maximize freehold and Crown royalty recoveries: Identify overpaid royalty obligations, underpaid royalties receipts, or missed Gas Cost Allowance credits and deductions allowable.
  • Complete a Liability Management Rating (LMR) analysis: Improve LMR ratios and increase access to capital.
  • Maximize Canadian indirect tax recoveries: Identify unclaimed credits, overpaid sales taxes, fuel and carbon tax obligations, and missed exemptions under current legislation.
  • Prepare Scientific Research & Experimental Development (SR&ED) claims: Maximize credits recovered for all qualifying companies under the present tax legislation.
  • Review customs and duty drawbacks and tariff reclassification: Reduce duty obligations through reclassification and identifying duty drawback opportunities.
  • Review other value-added tax obligations in other countries: Identify unclaimed credits and missed exemptions for VATs in foreign jurisdictions where operations or sales are occurring.

In many cases, these tax recovery services for most aspects of the energy sector can be completed on a performance-based fee structure, so there are no costs to organizations if no cash is found and recovered.

A number of solutions are available for businesses in the energy sector to secure additional cash flow and maximize cash tax recovery, from the new provincial and federal stimulus and incentives to royalty, indirect tax, SR&ED and customs duty recovery opportunities.  

A multidisciplinary approach could help energy companies survive this liquidity crisis and price war, and ensure that those recovery opportunities are maximized. We are working closely with professionals across our practice to provide guidance and assistance to our clients on raising cash and increasing liquidity, such as our corporate finance and restructuring advisory services teams, who are experienced with crisis management and formal restructuring options.

Alternative cash and liquidity options

There are still many alternative financing options available that can unlock additional liquidity in addition to LMR reviews and the cash tax recovery ideas. A few of these include:

  • Royalty financing
  • Asset-based lending/leasing
  • Contract or purchase-order financing

Asset-based lending often requires a carve-out from a senior facility (if currently in place) but is a good alternative option and can often leverage assets at a much higher value. It’s important to be proactive and explore these options with your financial partners as soon as possible.

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