Exploration & Production - Oil and Gas review

Critical Drivers of Exploration and Production Clockspeed

financial crisis management; investors will shun such stocks if better alternatives are available. A driver of Clockspeed Acceleration 2 in times of recession is maximising TSR without undue volatility as well as fast recovery from the down cycle. The final section (see Box 2) formulates common actions to achieve this.

Impact of the Great Recession on Clockspeed Accelerator 3 of E&P Companies Value accrual in the portfolio is concisely measured by the annual ROCEs. The ROCE shows a company’s pre-tax profits as a percentage of capital employed. A driver of Clockspeed Accelerator 3 is maximising ROCE to add value to the corporate portfolio. ROCEs that are lower than interest payments on debt imply that the company is losing money on its operations. Costly takeovers that do not generate cashflow in time, such as the 2006 acquisition of Burlington Resources by ConocoPhillips and Russian joint ventures with poor returns on investment (e.g. ConocoPhillips involvement with Lukoil), can burden a company and may lead to several years of underperformance. Figure 6 tracks ROCEs for selected companies towards the recession period. Conoco’s ROCEs for 2008 and 2009 are -29 and -30%, respectively. The final section (see Box 3) formulates common actions for the optimisation of value accrual in the corporate portfolio.

Recommended Actions to Improve Clockspeed The hydrocarbon industry, commonly perceived as conservative and slow to innovate, is now first in applying the novel concept of clockspeed acceleration. Clockspeed also provides a conceptual framework that enables technology deployment and provides insight and leverage to drive competitive strategies. Technical analysis is at the core of the clockspeed benchmark,4,9

and uses time-series and cross-sectional

analysis of production efficiencies and a range of financial KPIs (TSR, ROCE and other KPIs). The benchmark results establish the relative performance of peer group companies. Out-performers excel in each of the three clockspeed accelerator dimensions.

Translating the corporate strategy to practical clockspeed acceleration is essential for powerful direction-setting in times of change. Adjustment options for Accelerator 1 are mostly related to internal, operational efficiency and productivity; possible actions are listed in Box 1. Adjustment options for Accelerator 2 (see Box 2) are concerned with sustainable operational excellence by reducing failure rates and only taking calculated risks in field development and project options. Adjustments of Accelerator 3 focus on project robustness and portfolio value accrual (see Box 3).

Deciding which actions are appropriate for your company requires continuous assessment of the E&P clockspeed drivers. A decision- making model must ensure that decisions about resource allocation, technology solutions and project opportunities are supported by the

Box 3: Accelerator 3 Actions

Synchronisation – Under Recession •

•

Improve alignment of your organisational culture with the changed market dynamics in an appropriate strategic direction.

Consider stock re-purchase programmes to buy cheap stock, and reduce weighted average cost of capital (WACC) so that the company is better geared to face growth later.

• Choose an appropriate gearing or leverage of debt and equity financing to provide a buffer for new activities.

• Explore strategic targets for mergers and acquisitions (M&As), because market values of certain companies are low under recession and in some cases below replacement cost (as follows from concurrent price-to-book (P/B) ratios).

Optimisation – Always •

•

Make sure that the project options are varied and numerous so that the portfolio can be fed and fitted with the right projects at the right time.

Find the relatively easy oil reserves (to maintain reserve replacement ratio [RRR] – cash cows) rather than the complex fields (problem child), unless the production sharing agreement compensates well for the additional complexity. Complex refers to both technical challenges and government policy risks.

•

Avoid capital investments in projects that tie up cash for too long before delivering positive cashflow returns.

• Monitor the performance of all projects and feed this back into the corporate project portfolio for continued optimisation: the leadership must be prepared to kill a project if sub optimum. Simultaneously, continually generate and evaluate new project options, in a timely fashion. Negotiate favourable terms for long-term joint ventures that keep the corporate operating expenditure (OPEX) low and royalties high.

• •

Monitor tax regime(s) and negotiate long-term fiscal committments to ensure these remain favourable for project net present values (NPVs) over the full life-cycle.

Align corporate strategy with external business environment.

right resources at the right time. Applying remedial actions from Boxes 1–3 requires monitoring and benchmarking of the company KPIs that translate to clockspeed acceleration. In all energy companies with resources to acquire the best technology and to hire talented people, the principal focus must be on pushing forwards from ‘best practice’ to structural and engrained improvement at the right clockspeed for workflow, risk mitigation and portfolio valorisation. The actions suggested here can help individual companies to further optimise their clockspeed performance. n

1. 2.

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clockspeed – a novel strategy for optimizing utility in the Oil & Gas industry, Appl Energy, 2009;86:2222–43.

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improve the success of oil & gas ventures, Oil Gas Business J, 2008;1–24.

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