Oil and gas needs focused portfolio management to address decade-long decline in return on capital

Oil and gas needs focused portfolio management to address decade-long decline in return on capital

The FINANCIAL -- Global oil and gas companies must evolve their approach to portfolio management to improve return on capital (ROC) and remain resilient in today’s increasingly challenging market, according to EY’s Portfolio management in oil and gas: building and preserving optionality.

Top international oil companies’ return on capital halved over the last 10 years
Stakeholder demands push companies to improve portfolio management
Improving return on capital depends on flexibility and adaptability

The report, the third in EY’s Oil and gas capital projects series, highlights how the average ROC of the top 10 international oil companies (IOCs) has dropped by 50% in the last 10 years.

Andy Brogan, EY’s Global Oil & Gas Transaction Advisory Services Leader, says:

“Over the last few months we’ve seen stakeholders demand even greater capital discipline amidst ongoing oil price volatility and geopolitical concerns. Companies have responded by divesting non-core assets and postponing riskier and uncertain investments. But active portfolio management alone can fail to improve returns. More than ever before, companies must marry portfolio management with flexible and adaptable operating and financial models.”

Improving ROC depends on the speed at which companies can identify and respond to opportunities and threats. Companies that establish a portfolio with built-in flexibility, or optionality, will be better positioned for success. Optionality enhances companies’ ability to manage risks and redeploy resources. It also enables companies to reconcile the sector’s long-term investment horizon with sudden changes in the market.

Brogan says: “Moving forward, the world is going to be a more volatile and unpredictable place. Companies that have optionality can better manage their stakeholder’s requirements and deliver better returns.”

The report identifies a variety of approaches to build and preserve optionality given the long-term planning cycle inherent to much of the sector’s activity. It also identifies key leading practices that can be deployed to improve performance in this critical area.

Brogan says: “The drop in oil price came quickly and took many in the sector by surprise. Companies have turned to portfolio management to withstand this period of uncertainty, but it’s those who look ahead and embed optionality into their business models that will come out on top. There will be winners and losers, and the ability to respond quickly to unexpected market changes in crucial. Companies can’t afford to be caught unprepared in today’s competitive marketplace.”