Portfolio management: a strategic approach to achieving corporate targets

Abstract

Energy companies set themselves measurable targets across a number of metrics, which allow investors to rank and benchmark their performance. This can include exploration success, reserve growth, capital expenditure, production and revenues. But the oil and gas business is inherently high-risk.

On a project basis, companies may find it difficult to meet their corporate targets, for factors inside or outside of their control.

Portfolio management can help companies achieve all their goals—earnings, production and reserve replacements—in the most efficient manner, whatever be the external market conditions.

There is no one correct approach to portfolio management and evidence suggests that companies extol the virtues of the core principles but rarely adhere to them. In boom years, more capital was allocated to riskier projects, and in bust years, budgets and headcounts were slashed. Conversely, inefficient portfolio management can both destroy value and increase risk.

This industry is presently in a period of cautious capital allocation, with a greater focus on upstream returns, project screening, asset sales and a retreat to company heartlands, particularly in North America.

But are many of these decisions based on markets trends? And are not portfolio-driven? This extended abstract offers a commercial perspective on portfolio management by companies in the region, in light of recent trends, and includes case studies of successful portfolio-based decisions.