Wood MacKenzie: Sustained Outperformance is a Challenge for Explorers
Wood MacKenzie announced Wednesday that a comparison of its latest ranking of company exploration performance with the findings of similar analysis published back in 2005 reveals a striking absence of correlation: today's top explorers, by and large, are not the same as those of a decade earlier. In fact, most of the companies that ranked in the top half by returns in the original study have since slipped to rank in the lower half. Based on its findings, Wood Mackenzie predicts that companies now primarily focusing on quality acreage re-load will be the leading explorers of the second half of this decade.
Dr. Andrew Latham, vice president of Wood Mackenzie’s Exploration Service elaborates: “With the exception of Apache, Anadarko and BG, very few companies manage to sustain exploration outperformance for a decade or more.”
Sustaining Outperformance is Hard – How Long Can Top Explorers Stay Ahead?
Wood Mackenzie’s analysis underscores that strong results generally reflect commanding acreage positions in key emerging plays, with running room that sustains a few good years of drilling. But eventually, these streams of positive discoveries will mature, and the explorer will need to renew its basins of focus. This may impart a fundamental cyclicity to exploration performance, with individual cycles lasting around a decade. Once established, important emerging plays hold sway, with less emphasis on basin opening activity. Only when the results start to wane, does the explorer begin to concentrate on renewal again. There is also an investment component – companies focus on development post a good phase of exploration success, and take their eye off the ball with respect to acreage ‘re-load’.
“Companies that pull off the remarkable trick of basin renewal at the same time as a wave of success in a hot, emerging basin will stay ahead of the pack for a full decade or more,” Latham explains. “The rest can expect multi-year ‘drill-through’ and re-load cycles in their performance.”
Exploration performance variations also include an element of luck: “It’s easy to imagine a myriad of ways for chance events to influence exploration,” Latham says. “Some positive examples might be price increases, competitor discoveries de-risking acreage, or larger than mapped pool sizes. Negative examples could be unexpected fiscal tightening or delays due to third-party accidents. The importance of luck will vary from company to company and is, of course, nearly impossible to quantify.”
Furthermore, Wood Mackenzie’s analysis emphasizes that diminished returns during re-loading need not equate to a broader upstream renewal issue. Larger explorers and Majors can turn to M&A, business development or unconventional plays to help balance and sustain growth momentum through this part of a cycle. “This option is most relevant for larger explorers and Majors as these companies can take the time needed to build deep positions in very long-term exploration plays, confident that their near term performance will not suffer disproportionately,” adds Latham.
Recent Top Explorers Preparing their Comeback
According to Wood Mackenzie, the best guide for future star explorers is emphasis on acreage re-load now, regardless of recent drilling results.
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