Oil and gas companies are coming under increasing pressure to improve the standard of their narrative reporting after a survey today showed that nearly 50% of oil and gas analysts would change their rating of a company, based on the material provided in these new style narrative financial reports.
The survey, undertaken by KPMG, demonstrates that the appetite for risk disclosure is on the increase and that analysts will demand even more comprehensive information from companies on the key risks they face and how they intend to mitigate them.
Several years ago, the financial community was ambivalent about the value of narrative reporting when the Operating & Financial Review (OFR) was first mooted. Although the OFR was ultimately scrapped, it was succeeded by the EU Business Review. According to the KPMG survey, only 4% of analysts now see no value whatsoever in narrative reporting, suggesting that this style of reporting is here to stay.
Commenting on the results, Jimmy Daboo, an oil and gas partner with KPMG, said: “The results of this survey cannot simply be dismissed as analysts getting greedy and wanting as much information as they can possibly get their hands on. The threat to company ratings is a very real one, meaning that companies across the sector must ensure that the analyst community gets everything it is looking for from this new generation of narrative reports.”
“As our research shows, analysts now see the value of narrative reporting and fully intend to make use of the information it provides them with when determining a company’s rating. This support for narrative reporting is likely to harden over time as the quality of information improves and the need to provide such information becomes mandated by law.”
When asked whether a mandatory OFR would have provided a clearer understanding of a company’s future financial and business performance, 80% of the analysts agreed that it would have done. This explains why they have all latched on so readily to the wave of narrative reports which companies have produced either voluntarily or as a result of the Business Review, despite the latter being less onerous in its requirements than the OFR would have been.
In addition, 84% felt that the disclosure of key risks and uncertainties, alongside a selection of Key Performance Indicators – against which companies could prove how successful they had been in mitigating those risks – would lead to greater transparency around company prospects and strategies.
When asked how useful narrative reporting around certain key risks would be, project-based risks emerged with the highest mean score of 3.52 (out of 4). Strategic and market risks lagged well behind at 2.72. When asked against which areas analysts would most like to see financial and non-financial KPIs disclosed, reserves unsurprisingly emerged as the most popular choice. However, regulatory compliance was ranked eighth out of ten, with CSR trailing in tenth, meaning that the vast amounts of good work which is undertaken in these areas is mainly ignored by the analyst community.
Andrew Fields, a principal advisor in KPMG’s Enterprise Risk Management team, said: “What this survey shows is that while the nature of the risks facing businesses are constantly changing, the expectations of stakeholders on how businesses understand, manage and communicate their risk environment is also becoming increasingly demanding. As narrative reporting becomes more established, analysts will want more detail on the business risks that face a company and how they are being managed.”
“In keeping with an industry which is under constant scrutiny, oil and gas companies have always been at the forefront of best practice financial reporting. However, this new emphasis on risk-specifics opens a company’s hitherto internal processes to more scrutiny. Many organisations’ risk management approaches are now dated as many of these were devised during the immediate post-Turnbull era and have not been subsequently been significantly revised. The practice of risk management has moved on and, exacerbated by this ratings threat from analysts, the challenge for the industry is to revitalise, re-energise and revisit their risk management approach.”
-ENDS-
Further information:
Media enquiries:
Please contact Simon Griffiths (KPMG Corporate Communications)
Tel: 0121 232 3760 or 07887 657919
Email: simon.m.griffiths@kpmg.co.uk
