What lower oil and natural gas prices mean for your business

What lower oil and natural gas prices mean for your business

This past week, PwC’s National Professional Services Group placed front and center the business implications of dips in oil and natural gas prices by highlighting five key accounting issues in our first 2015 issue of The quarter close. While most discussion in this area has focused solely on energy companies, other industries are also experiencing knock-on effects - both positive and negative.

As Niloufar Molavi, PwC’s Energy sector leader, discusses here, it’s not just energy companies that the drop in oil and natural gas prices has impacted. Lower prices for energy companies translates into less capital investment, which means those who benefitted from past investment are now suffering from its reduction.

Two prime examples are construction companies that help build extraction facilities, such as oil rigs, and the manufacturers of heavy equipment used in those facilities. But the effects are extending to other industries too. For example, in the transportation industry, rail transportation’s previous price advantage relative to trucking has decreased with lower gas prices.

On the positive side of the equation are those companies benefitting from the decline in oil and gas prices. That group encompasses companies for whom oil and gas are significant raw materials, such as plastics and chemical manufacturers, who use natural gas as a feedstock. And, don’t forget airline companies that are enjoying lower fuel costs. As you can guess, many in this group are now seeing greater profits as a result of their increased margins.

So what do both groups – those negatively and positively affected by the drop in oil and gas prices – have in common when it comes to accounting? The need for transparency. We know that the S.E.C. is focused on the adequacy of the Management Discussion & Analysis disclosures. As such, companies should take the necessary time to explain the current and potential effects of the drop in oil and gas prices.

For those positively affected, it’s important to explain the extent to which increased profits are due to better margins and not higher revenue. Likewise for those negatively affected – they should take care to explain what continued, lower prices might mean not just for revenue and profits, but the potential for inventory valuation issues, liquidity issues and the potential impairment to long-lived assets. It will not suffice for them to simply discuss the past. MD&A requires disclosure of known trends and uncertainties that have had, or will have, a material favorable or unfavorable impact - as such they must also explain what they expect if the current trend continues.

For example, construction companies with idle equipment or rail transportation companies with idle rail cars might at some point need to record an impairment charge to their long-lived assets. Moreover, when it comes to accounting for income taxes, these companies might need to record a valuation allowance if they are in a net deferred tax asset position due to a decline in forecasted taxable income.

For the winners and losers from reduced oil and gas prices, we’ve identified a number of potential accounting issues. None, however, is more important than transparency - ensuring that you adequately explain what the reduction has meant thus far, and what it might mean going forward if it continues.

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