The Alberta Energy Regulator’s LMR rating is used as an indicator by the government to show which companies are at risk of potentially carrying too many liabilities compared to their production. Is it fair to say that the LMR ratio is accurate on identifying companies on the brink of default? The answer is usually no.
This summer, several companies unfortunately fell into receivership as a result of the current economic downturn. One of the companies, a junior oil and gas producer in central Alberta, unfortunately broke their covenants due to record low commodity prices. Many people familiar with such a situation would expect that a company in deep financial stress would have a low LMR and a large posted bond. For this company however, that was not the case. As of September 3 2016, the company’s LMR ratio was over 5. That said, it begins to make more sense as to why the AER was concerned with the recent court decision involving Redwater Energy.
The LMR calculation has no ability to show whether a licensee is highly levered with debt, pays an unsustainable dividend, or has considerable hedging losses. It’s just a simple ratio of estimated total assets divided by estimated total liabilities. For licensees with a relatively low LMR, they may be improperly represented on their ability to fulfill their asset retirement obligations. They could also have significant third party processing revenues or be financially stable with no debt payments. But not one of these factors is under consideration through the LMR program.
The existing system is fair on how it evaluates a broad range of Alberta licensees. Yet, the LLR program unfortunately does not have the capability to identify companies in serious financial distress.
For companies looking for simple ways to reduce their liabilities, Lighthouse Liability Solutions can help identify and remove unnecessary deemed liabilities. Just this month, our staff of experienced professionals identified and are in the process of removing over $4 million dollars of improperly allocated liabilities from a junior oil producer. Lighthouse has the expertise to help companies reduce their liabilities, remain compliant with government regulations, and support companies looking to acquire/divest assets through an ever changing regulatory environment.
Let Lighthouse Liability Solutions help you today.
Patrick Gratton, P.Eng