2021 is a pivotal year for the energy industry as it recovers from the pandemic’s disruption. The industry’s preexisting challenges were magnified by Covid-19: US energy usage fell to its lowest level in more than 30 years and 19 energy companies filed for bankruptcy in 2020. With more disruption in oil & gas production and electric power generation, cross-border challenges and changes in regulatory regimes, as well as a push toward green and renewable energy, the industry faces several challenges in maintaining consistent cash flow and meeting new consumer needs.
As energy company CFOs look for ways to meet these challenges, they may want to consider their companies’ legal assets, which can represent a significant amount of future value. Energy companies may find themselves pursuing large-scale commercial disputes more frequently than those in other sectors, given the nature of their business. Burford’s recently commissioned 2021 Asset Report includes a deep dive into how energy company financial officers think about these legal assets. Below are some key takeaways from the research:
Energy company CFOs see further potential in their affirmative recovery programs
The energy industry has been engaged in a range of high-value litigations and arbitrations that are expensive and time consuming. The largest arbitral awards are often from energy disputes—the biggest to date being the $15 billion award in the Yukos Universal Limited v. Russian Federation decision. Given that claims are complex and can involve multiple parties across several geographies, it’s no surprise that 77% of senior finance professionals in the sector say their affirmative recovery programs are “extremely” or “very” extensive. What is concerning is that less than half believe their programs meet their company’s needs. This suggests that collaboration between the financial and legal departments of energy companies needs to increase, and that energy companies need to conduct further analysis of their pending claims to access the full value of their legal assets.
Energy companies are less likely to leverage quantitative financial modeling for litigation
Just 13% of energy sector CFOs conduct quantitative financial modeling of litigation with the same rigor as other financial decisions.
According to the 2021 Asset Report, energy company CFOs generally rely on qualitative analysis as the sole method of evaluating pending legal claims, primarily because they believe that the variables involved in modeling affirmative litigation do not lend themselves to such analysis. This suggests that legal finance may be of real use, given that quantitative financial modeling of commercial legal assets is a core area of expertise. Energy company legal and finance teams can work with legal finance partners not only to finance their disputes, but also to identify and maximize the most valuable assets in their portfolios.
Optimizing litigation value
The pandemic has become a major catalyst for disputes within the energy industry. Legal finance providers can offer innovative solutions for energy companies seeking value from meritorious litigation to fund their business needs, which may include enhancing working capital, reducing risk or improving returns. Partnering with a reputable provider such as Burford can mitigate the impact of fees and expenses associated with large-scale claims, especially as we are able to fund cases on a non-recourse basis.
