BLOG: Upstream Companies, Is Your Portfolio in Shambles?

BLOG: Upstream Companies, Is Your Portfolio in Shambles?
A report by Deloitte identifies how E&Ps can build a portfolio to fit the future of their business.

Rewind to late 2014 through early 2017, when survival was the name of the game for oil and gas companies as prolonged low oil prices threatened the industry.

Many companies tried to protect and transform their portfolios, but today they still aren’t getting the results they’d hoped for – which dictates a need for deeper portfolio assessment, management and restructuring, according to authors of a new Deloitte report.

The report “The Portfolio Predicament” looks at analysis from the top 230 global upstream companies and found that the portfolios of 77 percent of companies could still encounter difficulties in sustaining current production levels, funding future growth and maintaining shareholder payouts in a $55 oil environment for the next five years.

So what gives?

“Put simply, the portfolios of most oil and gas companies worldwide are undergoing tectonic changes, making it more difficult to study and appraise them using standard portfolio evaluation metrics,” the report states.

Bridging the Gap

Deloitte found that there is no universal definition of success for E&Ps (exploration and production companies) and investors, so the company developed its Upstream Diversification Index (UDI) to analyze changes in an E&P portfolio across the following dimensions: fuel, region, resource, basin and investment cycle.

The UDI found the following trends from the past two to three years:

  • Most North American E&Ps extended their concentration in the highly competitive shale market.
  • The industry is still focused on crude oil; just 42 percent of companies had their share of natural gas (projected by many as the fossil fuel of the future) production grow.
  • US shale producers are focused on building optionality in their portfolio at the expense of optimization.

The authors concluded that E&P companies need a fit-for-the-future portfolio, which shields itself from probable price downsides ($40 per barrel), best sustains performance in a prolonged low-price environment ($55 per barrel) and scales up most quickly when prices increase ($65 per barrel). This is referred to as the 3S framework.

The companies who will fare well and the companies who “get it” share some commonalities. Using the 3S model, Deloitte selected the top 30 surveyed companies with the best fit-for-the-future portfolio and evaluated their collective traits using the UDI.

Here are the traits they found among companies with a future-proof portfolio:

  • Follow a Consistent Strategy and Actively Manage Portfolio. About 75 percent of the top 30 portfolios have been consistent in either concentrating or diversifying their portfolio, with a healthy pace of change and churn in their portfolio.
  • Prioritize Operational Excellence Over Location. Most of the top 30 companies have refrained from the general trend of entering or acquiring acreages in trending regions/basins/rocks (i.e., Permian) and looked toward basins such as Anadarko and Williston and the North Sea region.
  • Manage Resources by Focusing on Investment Cycles. Most top performers have built significant investment flexibility in their portfolio, by either focusing on short-cycle projects or reducing the time-to-market for mid- and long-cycled projects.
  • Exposure to Gas is Important, But Not Central Yet. Twenty-five out of the top 30 portfolios have an oil-heavy hydrocarbon mix, but the share in natural gas in their overall production isn’t less than 25 percent. Most of the top portfolios have maintained their oil-gas mix over the past five years.
  • Strong Financials Don’t Necessarily Mean a Future-Ready Portfolio. Most of the top 30 companies have a moderate yet disciplined net debt to capital ratio of 25 to 55 percent. Most of the top performers used the low interest rate environment to channel more debt finance into promising projects, allowing them to balance short-term financial priorities with longer-term value creation potential.

“Market conditions in oil and gas going forward are highly uncertain, and many internal and external factors can influence company performance and results,” Andrew Slaughter, executive director, Deloitte Center for Energy Solutions, Deloitte Services LP and one of the report authors, told Rigzone. “All other things being equal, and in a relative sense only, we might expect that E&P companies who are slower to adapt their portfolios to their core strengths and less effective in communicating the coherence between portfolio and performance to the market might be at some risk of underperformance versus their peers in terms of market valuation.”


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