Critical Drivers of Exploration and Production Clockspeed
Figure 5: Volatility in Total Shareholder Return Prior To and Over the Recession Period
Box 2: Accelerator 2 Actions 100
20 40 60 80
-40 -20 0
Marathon 2004
2005 Hess 2006 Occidental 2007 Exxon 2008 Chevron 2009 Conoco
Percentage returns show how many cents were earned by investors (+ %) or lost (- %) on each dollar invested in the company as the compound effect of dividends, capital gains and share buy-backs.
Figure 6: Deceleration of Returns on Capital Employed Towards the Recession Period
10 15 20 25 30 35 40
0 5
Marathon 2004
2005 Hess 2006 Occidental 2007 Exxon 2008 Chevron 2009/9 Conoco Conoco’s negative returns on capital employed (ROCEs) for 2007 and 2008 are truncated at the abscissa.
major support tool for simultaneously monitoring and connecting performance in the product value chain and the financial value chain. Immediately prior to the recession, nearly all oil operators were accelerating earnings per employee (see Figure 4). The recession reversed the acceleration into a deceleration for all. The difference in the performance of oil companies is in their control of the deceleration rate and the subsequent recovery to rapidly resume acceleration of earnings per employee. For example, Figure 4 shows how the slope of deceleration is steeper for some than for others over the recession period. Conoco fell deep in Q4 2008, but used the down cycle to write down a US$5 billion loss on its Lukoil assets. Earnings per employee need to recover swiftly for all companies by mitigating decline in oil and gas revenues by reducing capital and operational costs. Fine-tuning of the company’s clockspeed improves the efficiency of technology deployment and project execution operations. Critical in this clockspeed approach is retaining the connection between the physical product value chain and financial value chain. The final section (see Box 1) formulates common actions to further optimise Clockspeed Accelerator 1.
16 •
Synchronisation – Under Recession • Review how the company is affected by the recession and take adequate measures to mitigate the negative results for the business, and seize opportunities instead.
Optimisation – Always • Increase the reliability of equipment and facilities such that the frequency of failures is reduced.
• •
Avoid delays in project completions; companies that delay on projects already started but with belated delivery lose money.10
Optimise health, safety and environment (HSE) performance under all circumstances, as this is required for ethical reasons and corporate reputation and to avert disasters that might bite hard into the corporate earnings and brand name.
Base investment decisions on sound uncertainty modelling and risk analysis to ensure that decisions about new technology and business opportunities are supported by the right resources at the right time. The decision-making process for new investments needs to go further than net present value [NPV] calculations.
• Balance risk and opportunity to avoid a steep drop in earnings, which is a key performance indicator (KPI) for poor risk management if unsteady over the medium term.
• Avoid undue (country) risk. •
Avoid volatility in stock performance as it may upset prudent investors. Once they move away, it may be hard to lure them back from another profitable business segment.
Impact of the Great Recession on Clockspeed Accelerator 2 of E&P Companies This most critical dimension of E&P clockspeed focuses on the improvement rate of risk mitigation. At the field level, risk mitigation involves minimising deferred production by rapid remedies to equipment failure, reservoir damage and facility malfunctioning, hand in hand with innovative development solutions so that production can be accelerated. For example, Schlumberger’s while-drilling telemetry achieved a reduction of average hours between failures in dedicated programmes to boost reliability (PowerPulse started in 1993, succeeded by TeleScope in 2004; both programmes achieved a 400% improvement in reliability).7 Operational excellence and keen dedication to health, safety and environment (HSE) standards without costly accidents translates to extra cash earned. If companies make a mesh instead, investors will recognise this as expressed in a high volatility for ROCE and higher Betas for stock price volatility. Under the financial crisis, the companies’ single biggest risk exposure was a sustained implosion of their share price, wiping out market capitalisation. Investors in the oil sector have endured steep reductions in total shareholder returns (TSRs) since the onset of the great recession. Figure 5 graphs the dip in TSRs over the recession period for selected companies. Handling the crisis well at individual companies means climbing out of the recession relatively fast. The prudent investor rewards such companies for their efforts by buying into potential capital gains. A steep dive in TSR and lagging recovery is an expression of poor
EXPLORATION & PRODUCTION – VOLUME 9 ISSUE 1
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