According to EY's Portfolio management in oil and gas: building and preserving optionality, oil and gas companies across the globe must evolve their approach to portfolio management. This evolution is necessary to improve return on capital (ROC) and remain resilient in today's increasingly challenging market.
The third report in EY's Oil and gas capital projects series highlights how the average ROC of the top 10 international oil companies 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 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.
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.
Adapted from press release by Joseph Green