By: Eric Chenoweth, Investment Manager and Legal Counsel
In recent years, the oil and gas sector has suffered through weak demand and low prices. Industry analysts now see a recovery underway, and along with it, opportunities for companies to spend money on vital projects that were set aside during the downturn.
According to a recent report by Deloitte, “$620 billion worth of projects through 2020 are estimated to have been deferred or canceled as a result of the downturn .… While this trend certainly seems to lower the risk of individual companies in the industry, it may pose some broader questions regarding energy supply and security. Where will supply come from in 2020 and beyond? Are there enough short-cycle projects to fill the supply gap?”
After years of revenue and profit challenges, the budget available for such vital capital projects may remain tight for the foreseeable future. The same is true for essential litigation. A cash crunch may lead companies to make sacrifices – such as settling claims early for pennies on the dollar, hiring less-experienced counsel, or abandoning a case altogether – that can diminish their potential recoveries. Enter litigation funding.
Litigation funding can provide distinct advantages for oil and gas companies that are seeking ways to generate or preserve capital as they emerge from an industry-wide downturn, by providing financing for meritorious cases. Partnering with a litigation funder like Bentham IMF allows a company to use money that would have been devoted to litigation expenses to capital projects or other corporate needs.
Funding may also help improve the bottom line and enhance a company’s attractiveness to investors and lenders. Litigation is often perceived as a drag on corporate profits. When a company spends money on litigation, those costs appear on the balance sheet as an expense. Yet, even in situations where the company may have a strong likelihood of a substantial return, potential recoveries cannot be recognized as assets. Recoveries can only be recorded as an asset when they have been realized.
By providing money to cover expenses, a funder helps remove litigation costs from the profit-and-loss statement. As a result, the company’s bottom line improves. In addition, nonrecourse funding can be booked as revenue before litigation has ended, provided the capital received is greater than any fees paid out.
For in-house lawyers, funding provides an added benefit. As most legal departments are seen as cost centers by C-suite executives, funding can help make in-house legal departments revenue generators. By having a funder shoulder some of the risk of litigation, companies may pursue meritorious claims previously left on the cutting room floor due to tight legal budgets.
Litigation funders will only finance claims that have the best chance of success. By identifying the strongest possible cases and offering the resources needed to effectively pursue them, a funder can increase the possibility of a substantial recovery – one that may provide an additional upside for the company. After the funder has recovered its investment, those additional funds can also be used to finance the kinds of projects that will help the company thrive.
Contact us to learn more about how Bentham can provide financing options to help oil and gas industry enterprises generate capital while satisfying their litigation needs.