Going Concern Checklist for Energy
Tailored going concern assessment for energy entities. Covers industry-specific indicators including commodity price exposure, reserve adequacy, decommissioning obligations, and energy transition risks.
Going Concern
Checklist.
Email unlocks the free download.
No payment required. Unlock above to download the full working paper.
Going concern assessment: Energy
Energy companies face going concern risks driven by commodity price volatility, capital-intensive operations, and the structural shift toward renewable energy. Upstream oil and gas entities are exposed to price cycles that can render reserves uneconomic, while utilities face regulatory and transition risks as energy markets decarbonise. The long-term nature of decommissioning obligations adds a unique dimension — these liabilities can exceed the entity's equity if asset values decline.
Key risk factors: Energy
Key energy sector going concern indicators include: commodity prices sustained below the entity's breakeven production cost, proved reserve depletion without adequate replacement through exploration or acquisition, decommissioning obligation funding shortfalls, regulatory changes that strand assets or reduce allowable returns, loss of key licences or concessions, and inability to fund the capital expenditure required for energy transition.
Commodity price sensitivity — model the entity's cash flows at current commodity prices, not at management's optimistic forecasts. Assess the breakeven oil/gas price and how long the entity can sustain operations below breakeven.
Reserve replacement ratio — if the entity is producing reserves faster than replacing them, this signals a finite operational life. Assess the remaining reserve life at current production rates.
Decommissioning obligations — these are often large and long-dated. Assess whether the entity has adequate financial provision or security (bonds, guarantees) to meet these obligations, particularly if asset values are declining.
Regulatory and licence risk — energy entities depend on government-granted licences and concessions. Changes in regulatory regime, environmental requirements, or carbon pricing can fundamentally alter the economics.
Energy transition exposure — assess the entity's strategy for the energy transition. Fossil fuel assets may face accelerated depreciation or impairment if they become stranded assets.
Hedging programme — energy companies often hedge future production. Assess the extent and tenor of the hedging programme — a well-hedged entity has protected near-term cash flows even if spot prices decline.