Oil and gas prices are critical to companies’ reported capital strength and performance. These need to be properly scrutinised.
Based on our analysis of selected listed European oil and gas company financial statements, we believe there may be a problem of systemic overstatement of capital and profits linked to overly optimistic long-term oil price assumptions that fail to take account of the international commitment to phase out fossil fuels. Critically, shareholders have almost no information on how sensitive reported assets and liabilities are to lower long-term prices.
US company disclosures are often weaker than European peers, leaving shareholders in the dark about the current price assumptions they make, never mind providing sensitivity analysis. This means investors are unable to interpret their reported results or compare them to peers.
Overstatement matters because it can lead to capital misallocation and, ultimately, capital destruction and cuts to dividends. This is particularly concerning as the oil and gas sector grapples with decarbonisation – especially the global commitment to reach net zero emissions by c2070. It works against efforts to combat climate change as it will tend to encourage excessive investment into new fossil fuels.
The paper further draws attention to the inconsistency between the emphasis placed on decarbonisation as a strategic risk to the business in narrative disclosures in Annual Reports, and the lack of comment by the Audit Committee or auditors on how they have considered decarbonisation in their stress testing of the financial statements.