Project Portfolio – Cash Flow Forecast

Energy Royalty Trust 2003-04

Objectives

The cash flow forecasts for this Canadian energy royalty trust were consistently above actual cash flow, and the variances were increasing in spite of considerable management attention. 92% of cash flow was distributed to unit holders every quarter so inaccurate forecasts risked damaging the Trust’s reputation with investors, analysts and partners.

Accurate cash flow forecasts are critical to the smooth functioning of an oil and gas trust. This Trust’s production accounting and other operational accounting systems had been inherited from traditional oil and gas corporations, where budgeting and forecasting are less fine-tuned. Because of these heritage systems, troubleshooting cash flow variance was very cumbersome and was consuming an enormous amount of management and staff time.

The project objectives were to isolate the causes of the variances and to simplify the production of reliable cash flow forecasts.

Fall Line’s Role

The Trust assembled a team of senior operational leaders to isolate the causes of the variances and plan action to make the forecasts more reliable. This team included the VP Operations, CFO, Manger Exploration, Manager Production, Manager Land.

Fall Line Systems guided the team through a structured problem solving process over three meetings. During this process we eliminated many of the assumed causes and focused quickly on the three factors driving the variance. For example, it had been assumed that forecasts from non-operated properties were a key source of error; however with a detailed examination we could see these forecasts varied on both the positive and negative side and did not contribute significantly to the cash flow forecast errors.

Results

By the mid-point of the second meeting the team had identified the main causes of the variances and planned simple steps to make the cash flow forecast more reliable. These steps produced immediate results and the next four cash flow forecasts were much more accurate. To increase confidence in the forecasts for the medium term, an analyst position was created to troubleshoot forecast variances and a discussion initiated with the Board to re-set tolerances for variances from actual cash flow. With these changes, management and staff were able to re-focus on other parts of the business.