case studies of portfolio management - gaffney cline...
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Case Studies of Portfolio Management
The Royal Institution
20 May 2015
2
Disclaimer
This set of presentations has been prepared exclusively for discussion purposes
during this event. The materials presented should not be understood as GCA
forecasts or predictions of oil and gas prices or future industry conditions and they
should not be understood as a specific recommendation in respect of any particular
decision or course of action.
3
Today’s Agenda
Acquisition and Divestiture (A&D) Activity During the Last 10 Years of High
Oil Prices
Evolution of Debt-to-Equity Ratios – Majors and Other Selected Companies
A&D Activity Drivers
Case Studies – Best Practices in Portfolio Management
QGEP – Building a Portfolio from Scratch
Anadarko – Portfolio Reshuffling and Deleveraging Post-Acquisition
Midstream – “Outsourcing” Parts of the Value Chain to Suppliers
4
Since 2005, A&D value increased while leverage levels exhibited
varying patterns, suggesting differing uses for extra liquidity
Asset Deal Value 1 vs. Leverage of Majors and Selected Companies 2 and U.S. Federal
Funds Rate
Selected
Companies(2): High
Leverage (>30% in
2014)
Asset Deal Value ($B)
Notes:
(1) Total value of global asset deals worth more than $10 MM each; leverage measured by net debt-to-equity ratio; active companies in A&D activity
(2) Majors: BP, Chevron, Exxon, Shell, Total; Selected Company Group: Anadarko, Apache, BG, BHP, CEPSA, Devon, Ecopetrol, Encana, Eni, Galp, Hess, Marathon,
Noble, Petrobras, Petrochina, Pioneer, PTT, Repsol, Sasol, Sinopec, Southwestern, Statoil, Talisman
Sources: IHS Transaction Analysis Report; U.S. Federal Reserve Bank; GCA analysis
Majors (2)
Leverage, U.S. Federal Funds Rate
0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
120
140
160
180
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Selected
Companies(2): Low
Leverage (<30% in
2014)
U.S. Federal
Funds Rate
5
In a low oil price environment, assets in a company’s portfolio may
become “out of the money”
Range of Break-Even Prices (1) by Play Type, US$ / bbl
0
20
40
60
80
100
Deep Water Oil Sands Unconventional Shallow Water Onshore
Notes:
(1) Prices such that investment is recouped over project cycle. Indicative cost ranges based on GCA type project modelling
Source: GCA Type Project Modelling
Asset in the money
Asset out of the money
Conversely, during a high oil price environment, the entire portfolio will very
likely be “in the money”
Costs, Oil Price,
US$/bbl
High Price Oil
Low Price Oil
Cost Range
6
In a continued low price environment, A&D activity will be driven
by companies’ needs to adjust their balance sheets
High Price Oil – A&D Drivers Low Price Oil – A&D Drivers
E&P
Balance
Sheet
Plenty of cash available – all assets are
“in the money”
Reduced cash generation – some
assets in portfolio “out of the money”
Overall, companies with low leverage
ratios
Eventual impairments and reduced
asset values will impact leverage levels
Cash
Leverage
E&P
Finding
and
Develop-
ment
High development costs – “buying rather
than drilling”
High development costs – “buying
rather than drilling” persists – though
there might be some relief on cost side
Still enough cash available to fund
exploration programs and farm-ins
Reduced cash generation to fund riskier
exploration – exploration suffers most
Development
Exploration
Capital
Markets
Public and private equity markets
(energy focused) are available
Public and private equity markets
(energy focused) are still available, but
become more selective
Cheap money (low interest rates)
available
Cheap money policy to continue for
some time
Public and
Private
Equity
Cost of
Money
A&D is driven by “liquidity” provided by
financial markets
A&D is driven by balance sheet
pressure to adjust the portfolio
7
Today’s Agenda
Acquisition and Divestiture (A&D) Activity During the Last 10 Years of High Oil
Prices
Evolution of Debt-to-Equity Ratios – Majors and Other Selected Companies
A&D Activity Drivers
Case Studies – Best Practices in Portfolio Management
QGEP – Building a Portfolio from Scratch
Anadarko – Portfolio Reshuffling and Deleveraging Post-Acquisition
Midstream – “Outsourcing” Parts of the Value Chain to Suppliers
8
Well-run companies must manage a financial platform that is both
able to generate cash and fund long-term activities
Ultimately companies must also be able to pay dividends to their
shareholders or make cash payments to their governments
Best Practices in Portfolio Management
Cash generation from producing assets (and from balance sheet
sources) should be enough to fund “cash consuming” activities Generate cash
from operations
Projects that will generate cash in the medium term (3 to
6 years) and at benchmark development indicators
($/boe, time to first oil, etc.)
Development
projects
Projects that will generate cash in the longer term (5 to
10 years) and at benchmark exploration indicators (hit
rate, average discovery size, etc.)
Exploration
projects
Cash-generating
Cash-consuming
9
QGEP grew its portfolio position gradually, starting within an
oilfield services company and then becoming a pure E&P firm QGEP (1) Historical Overview and Key Milestones
Notes:
(1) During the “incubation” phase the company had no operated assets; Atlanta is the first asset operated by the company
Sources: Company information; GCA analysis
Start of
activities
2000
Farm in
Manati
block
(Petrobras)
Incubation Phase
E&P activities carried out within
oilfield services company
Acquires interests in several
exploration projects
20 wells drilled (non-operated)
Manati first-
gas
2007
Atlanta
reserves
certification
2014
IPO
Acquires
stake in
Carcara
(Shell)
2011
Acquires
stake in
Atlanta (Shell)
2011
Acquires
interests in 8
exploration
blocks
2013
Secures
FPSO for
Atlanta
2014
Planned
Atlanta first
oil
2016
First operated
project on-stream
2011
Becomes a pure
E&P company
IPO – Early 2011
E&P activities are carved out of oilfield business
Raises US$ B 0.9
Invests in exploration rights, also assuming
operatorship of some
Relinquishment of unattractive assets
10
Despite operating only in a single country, the company built a
diversified portfolio across 8 distinctive basins
QGEP Asset Base (1) Overview
1 Amazonas basin – 1 block
2 Pa-Ma basin – 2 blocks
3 Ceará basin – 1 block
4 Pe basin – 2 blocks
5 Ca-Al basin – 2 blocks
6 Jeq basin – 1 block
7 ES basin – 2 blocks
8 Santos basin – 2 blocks Presalt
Notes:
(1) Company had some interests in onshore assets that were relinquished over time
Source: Company information; GCA analysis
11
Its balanced portfolio is providing the necessary cash to fund
future growth
QGEP Asset Base by Maturity
Exploration Development Production
2D Drilling FEED Ramp up Plateau EPC and Pilot 3D
Assets
Manati
6 MMm3 / day
gas production
(210 MMcfd)
Cash generation
Pa-Ma
Pe-Pb
Carcará
CAL-AL
BM-J-2
Amazon
Ceará
ES
Cash consumption
400 meters of net
pay of high quality
31° API oil
Atlanta
2P reserves of 190 MM
Bbl of oil
2 producer (horizontal)
wells drilled
FPSO secured
Early production system
to come on-stream by
2016
Cash consumption
Atlanta
Source: Company information
12
After Anadarko acquired Kerr-McGee, it engaged in a series of
divestments as part of an effort to refocus and manage exposure
Anadarko Debt-to-Equity Evolution and Key A&D Milestones
0%
20%
40%
60%
80%
100%
120%
140%
160%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Kerr-McGee acquisition
Divests all Canada assets
Multiple onshore U.S. Lower
48 and Gulf of Mexico
divestitures
Entry into U.S. shale (Eagle
Ford, Wattenberg, Wolfcamp,
Marcellus)
Divestment of 10% of
Mozambique LNG Sale of EOR assets in
U.S. – 2014/15
Focused midstream U.S. gas
investments via Western Gas
Master Limited Partnership
Acquiring stakes in scale projects
Selling out of mature projects
Deep water projects: Gulf of Mexico,
Africa, Brazil
Focus on U.S. shale – quick pay outs
Actions to Refocus Portfolio
Sources: Company information; GCA analysis
13
The company’s capital expenditure allocation is commensurate
with its portfolio strategy
Anadarko’s Capital Expenditure Expectations (1), 2015
$ Billion
0% 10%20%30%40%50%60%
Short Cash Cycle
Mid Cash Cycle
Long Cash Cycle
Other
0% 10% 20% 30% 40% 50% 60%
US Onshore
Int'l & DW Ops
Int'l & DW Exp
Mid & other
By Cash Cycle By Area
Notes:
(1) Capital expenditure expectation at $5.4-5.8 B, a 33% reduction over 2014. Short cycle = investments in current fiscal year; Mid cycle = growth in returns within 2 to 3
years; Long cycle = growth in returns over 3 years
Sources: Company information; GCA analysis
14
To reduce its exposure, a midstream company looked for a new
business model so it could “divest” future CAPEX requirements
Midstream Terminal Concept
Note: (1) CALM = Catenary Anchor Leg Mooring
Source: GCA analysis
Field A
Field B
Export
Tankers
Export
Tankers
Shuttle
Tankers
Field C
Field n
Floating Transport
Line
Floating Storage and
Offloading (FSO)
CALM (1) Buoy
CALM (1) Buoy
Midstream Asset to be “Divested”
…
15
The innovative model involved the participation of key suppliers in
the engineering, construction, and financing of the asset
Proposed Business Model (1)
Subsea / Buoy
EPCI
Consortium
Engineering Construction Financing
Midstream
Operator
FSO
owner
Operations
Midstream
Operator
Invest in
subsea and
buoys
Subsea /
Buoy EPCI
Ownership
FSO
Subsea
Buoy
Asset
development
and
operations
Vessel
EPCI
Vessel
EPCI
FSO
owner
DEVELOPMENT OF TERMINAL TERMINAL Stages
Brings
a BCP
FSO
BCP
contract Long term
contract
Note: (1) BCP = Bareboat Charter Party; FSO = Floating Storage and Offloading; EPCI = Engineering, Procurement, Construction and Installation
Source: GCA analysis
Subsea / Buoy
EPCI
Subsea / Buoy
EPCI
16
If you had a choice which portfolio would you pick and why?
The answer is not a simple one…
Cumulative Production vs. Costs
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
90
100 kboepd 100 kboepd
Costs, Oil Price,
US$/bbl
Profit
Loss
Asset 1
Volume
Asset n
Volume
Portfolio 1 Portfolio 2
17
The Profit & Loss is simply a snapshot of the whole picture
What are the contingent and prospective resources?
Is it there room for redevelopment and/or for newer technologies?
What is the maturity of the portfolio?
Could cost cutting initiatives take assets back to be “in the money”?
18
Key Takeaways
Since 2005, acquisition and divestiture (A&D) value tracked oil price, implying that
valuations are influenced by higher earnings in the sector
Following this A&D positive trend, and on the back of a loose monetary policy cycle,
companies increased their overall levels of leverage (debt-to-equity ratio)
However, if a low oil price scenario persists, many assets in a company’s portfolio may
become “out of the money”, stressing balance sheets even further
A combination of lower cash generation and highly leveraged balance sheets may
force companies to review their portfolio strategies
Best practice companies pursue a constant equilibrium between cash generation
activities (production) and cash consuming ones (development and exploration)
Several case studies illustrate how companies develop their strategies and use A&D to
adjust their portfolios accordingly