Exploration and Production: Keys to Success and Common Reasons for Failure

Transcription

1 Exploration and Production: Keys to Success and Common Reasons for Failure Robert Arnott Oxford Institute for Energy Studies 22nd February 25 1

2 Keys to Success and Common Reasons for Failure Understanding the EP business Phases of the business and best in class attributes Understanding Strategies of Integrated Companies Key to independent EP company success Independent EP Strategies Identifying opportunities and niches 2

3 Three Phases of Exploration and Production Early Main Mature Exploitation Exploitation NEW PLAY AND FRONTIER Few competitors Majors, acreage brokers Risk takers New technology High upside No Infrastructure Generous tax terms e.g. Deepwater MAJOR DISCOVERIES Many competitors Majors, NOCs, EP companies Main area of industry spend Established technologies Expensive entry Low upside Major asset trading OVER- INVESTMENT Many players Majors, NOCs, EP companies Low/negative returns Reinvestment reduced Little exploration activity Infrastructure ownership hinders new entry Adapted from Browne (1999), Halbout (23) 3

4 Features of Best In Class Goal: A Portfolio of assets that minimises complex managerial structure and focuses on projects that offer the best opportunity for high profitability and growth in the near and long term MATERIALITY Number of high impact discoveries Strategic focus Preservation of regional knowledge Optimised portfolio Clear access strategy CAPITAL EFFICIENCY Finding costs Balances risk assessment Optimised development of + + reserves Clear exit strategy Constant investment reviews VALUE CREATION Cycle time to commercialisation Realistic cycle times Optimal shareholder management Adapted from Wood (2) 4

5 Integrated Oils: How do they fit this picture? Early Exploitation Main Exploitation Mature TOTAL BP EXXON ROYAL DUTCH 5

6 Early Exploitation: Integrated Oil Strategy Become a basin master Gain insight into hot exploration areas Leverage long-term relationships First mover advantage Example: Gulf of Mexico Deepwater Example: Aggregate Position in hot exploration areas* 3% Share of Reserve 25% 2% 15% 1% 5% SHELL All Others EXXON BP % % 1% 2% 3% Relative Share of Acreage Source: J.S Herrold (24) * Angola, Caspian, GoM, Nigeria 6

7 Majors have flexibility to optimise the portfolio Average global success rate is 1 in 6 Need to balance risk and reward Optimising the Risk Average Commercial Success Rates LOW DESIGNER 6% RISK TYPICAL PROSPECT PORTFOLIO FRONTIER Success Rate 5% 4% 3% 2% 1% % Angola (Deep) US GoM UK LOW REWARD HIGH Number of Wells Drilled (91-) Source: Wood Mackenzie (23) Source: After Wood (2) 7

8 Exploration: Majors Track Record Only just replaced reserves annually since 199 Big difference between the various companies SEC reserves do no reflect actual performance Organic RR Ratio 9-3 Reconciling SEC versus Actual Wood Mackenzie Estimate AHC SHEL REP MRO CVX ENI BP COP XOM TOT STL NHY OXY PCA 5 BG.L COP.N TOTF.PA REP.MC ENI.M BP.L NHY.OL CVX.N PCA.TO OXY.N STL.OL XOM.N SHEL.L AHC.N MRO.N Source: Company Data SEC RR Ratio Source: Wood Mackenzie (23) 8

9 Exploration: Have the Majors Added Value? Majors have invested $5 billion from Only created $23 billion in value Only 13 out of 25 companies have added value Exploration spend vs NPV Value Added vs Income CHV BP XOM USD millio Total Exploration Cost NPV of Discoveries Source: Wood Mackenzie (23) Value Added/USD Spe 2. TOT SHEL CHV BP. XOM SHEL TOT -2. TOT] SHEL CHV BP XOM Net Income per Barrel Source: OIES (25) 9

10 Exploration: Key Reasons for Failure Exploration spending fallen as a percentage of upstream capex Failure rates starting to rise as acreage positions diminish Rising cost pressure Success Rates and Falling Capex 35% 3% 25% 2% 15% 1% 5% % Exp as % of Capex (LHS) Failure Rate(RHS) 8% 78% 76% 74% 72% 7% 68% 66% 64% 62% 6% Source: Company Data, CSFB (24) Cost $ per boe % 8% 6% 4% 2% % -2% -4% Finding and Dev Costs FD Dev Source: Company Data Changes in Acreage Positions TOT REP SHEL STL BP ENI CVX Source: Company Data 1

11 Exploration: Where next for the majors? Access is an issue for all companies Alliances with NOC are inevitable Further consolidation in the absence of growth Undiscovered 5 mmbbl fields EMV: Deepwater Attractive No. of Fields Cameron Netherlands JDA UK Shelf GoM (Deepwater) Angola Deepwater Nigeria Bangladesh Deepwater Kazakhstan Remaining Giant Fields High Accessible* Medium Accessible** Low Accessible*** Venezuela * All others ** China, Oman, Russia, Venezuela *** Algeria, Iran, Kuwait, Libya, Mexico, Saudi Arabia, UAE Source: USGS, JS Herrold Source: Deutsche Bank (23) 11

12 Mature Provinces: Majors Strategy Focus on cost reduction Focus on maximising margins Focus on portfolio optimisation Volume of Reserves Traded 12 Cost $ per boe Production costs reduced Source: Company Data 8 Earnings enhanced mmboe Cost $ per boe Source: Company Data Source: Company Data 12

13 Main Exploitation: Cash Cow for Majors Main area of investment but Internal and external constraints on growth More money now returned to shareholders than invested upstream 1 Majors Internally Financed and Cash Returned to Shareholders $m Internal Cash Flow Shares Dividends Capex EP Capex 98 2 Share Buybacks 4 Source: OIES, Company Data Source: OIES, Company Data 13

14 Majors EP Strategy: Conclusions IN To be successful a company has to spend enough money on new business to ensure it has a significant share of initial finds To be successful a company must know when it has reached the point where further investment would be unproductive OUT 14

15 What Determines EP Company Success? WITHIN CONTROL OUT OF CONTROL Operations Reserves Growth Production Growth Equity Market Where in the cycle? Access to funding TOTAL SHAREHOLDER RETURN Growth in Capital Return of Capital Finance Cash Flow Growth NAV Growth Commodity Prices Oil/Gas Prices 15

16 EP Companies: Where do they fit? Early Exploitation Main Exploitation Mature e.g. Desire e.g. Venture e.g. Acorn e.g. Cairn, Lundin e.g. Paladin 16

17 EP Companies: How do they grow? EXPLORATION EXPLOITATION REHABILITATION ASSET DEALS Cost Cost of of access Access Technology Technology Good Data Data People People Modelling Project Management Infrastructure Access Contract terms Reservoir modelling Project management Correct deal analysis Strong technical diligence Financial strength CORPORATE As left + Finance Communication Integration Skills ORGANIC GROWTH ACQUISITIVE GROWTH 17

18 EP Companies: Stated Strategies Stated strategies are very variable Value, growth and material positions require Actual strategy often varies from stated strategy What is in the strategy statement Exploration Shareholder Value Materiality Production Op Acqusition Niche Growth Environment Financial Strength Techology What they actually say they want Production PUDS Oil Op or Non-Op Non-Op Op Exploration Gas Mature Oi/Gas Mix Low Medium High Source: OIES, Company Data Low Medium High Source: OIES, Company Data 18

19 EP Companies: Strategic Differentiation Despite offering balance strategies clear distinction between : Companies who have added all reserves through acquisitions Companies who have added all reserves through exploration Additions through E or A Capex is either E or A driven 1% 25% 9% 8% 7% 6% 5% 4% 3% 2% 1% % EDG.L CNE.L CUX.L JKX.L PMO.L MRS.L DNO.NO VPC.L DNX.L TLW.L PLR.L SIA.L BUR.L ROS.L Proportion of Cashflow Spent on Explorat 2% 15% 1% 5% E Driven A Driven % -5.%.% 5.% 1.% 15.% -5% Acquisitions Exploration Proportion of Cashflow Spent on Acquisitions Source: OIES, Company Data Source: OIES, Company Data 19

20 EP Companies: Just how successful? Most of the growth in the sector comes through acquisitions (cheaper) Step change exploration success is rare (volatile) $/boe Erratic FD track record $/boe Cheaper to buy than explore $/boe BUR.L CNE.L CUX.L DNX.L DNO.NO EDG.L JKX.L 3.6 MRS.L Source: OIES, Company Data % 9% 8% 7% 6% 5% 4% 3% 2% 1% % EDG.L SIA.L CNE.L Proved Acquistion Cost PMO.L DNX.L SE:LUPE DNO.NO MRS.L TLW.L FD Cost FD Cost 1-3 Hit or miss! Capital Allocation 1-3 PLR.L PMO.L ROS.L SIA.L TLW.L LUPE:ST Source: OIES, Company Data PLR.L JKX.L Exploration Development Acqusitions Source: OIES, Company Data BUR.L CUX.L ROS.L Source: OIES, Company Data 2

21 EP Companies: Only a short time to deliver Average life of project from 1 st exploration to abandonment is 25 years Average life of EP company is less than 1 years Management has deliver outstanding results and quickly US EP Companies to Survive 25 Years 25 Years Change in EP Company Numbers 97-4 US Canada Source: JS Herrold, Harrison Lovegrove Source: Morgan Stanley 21

22 EP Companies Usually Capital Constrained Most EP companies rely on Other Peoples Money to: Finance the gap between cash flow and exploration Run the business as a going concern Failure to maintain a robust balance sheet is common concern Living Outside of Means (1-3) A Fine Line between Success & Failure 2 18 EQUITY SUCCESS FAILURE Internal Cash Flow Outside Finance Capex OPPORTUNITY BEGGING BOWL Source: OIES, Company Data Source: OIES 22

23 EP Companies: Equity Market Sentiment There are periods when the equity market views the sector positively EP companies must refinance during these periods The high expectations are rarely fulfilled EP Sector and Market Opening OPEN OPEN Source: OIES, Datastream AIM: Value New Deals ( m) New New Further Source: London Stock Exchange AIM: Number of Issues Further Source: London Stock Exchange 23

24 EP Companies: So who has succeeded? 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% There is no consistent pattern Equity markets now discounting exploration success which is a risk TSR (Annualised) 1-4 LUPE.ST CUX.L JKX.L CNE.L MRS.L PLR.L DNX.L EDG.L PMO.L DNO.NO TLW.L SIA.L ROS.L Source: OIES, Company Data Production Growth Reserve Growth Production Growth vs TSR 25% 2% 15% 1% 5% % -5% R 2 =.53-1% -1% % 1% 2% 3% TSR 1-4 Annualised Reserves Growth vs TSR Source: OIES, Company Data 6% 5% R 2 = % 3% 2% 1% % -1% -2% -1% % 1% 2% 3% TSR 1-4 Annulaised Source: OIES, Company Data 24

25 EP Companies: Common Reasons for Failure Scatter Gun approach to exploration Extremely diversified portfolio and failure to deliver projects Weak balance sheet No clear exit strategy Diversity Undercapitalised Niche Diversified Domestic Existing New Captain Sensible Elephant Hunter Entrepreneur Chairman s Folly Size Existing New Source: Harris, Jeffs (1993) 25

26 EP Companies: Common Reasons for Success Focus: Offset the advantage of size through strategic differentiation Competence: Recognise where in the chain you have competence and exploit it Opportunistic: Be opportunistic and take advantage of deals where you have insight Is there a cycle? Financial view Is there a cycle? Industry view Top Bottom Middle No Cycle No View V Top Bottom Middle No Cycle No View Source: OIES Source: OIES 26

27 Even Fools are Lucky! But to achieve consistency need to: Deliver above average results. This typically occurs when a niche e is exploited Remain entrepreneurial, flexible and opportunistic, keeping all options open Remember that teams are usually too small to deal with more than a 3 core area strategy. Remember that: The growth potential of an individual company that competently exploits e a niche is significantly higher than all the factors that influence the entire group 27

28 Exploration and Production: Keys to Success and Common Reasons for Failure Robert Arnott Oxford Institute for Energy Studies 22nd February 25 28