E&P companies need asset portfolios that enable the production of energy from the best asset class in a given moment. These portfolios must be highly flexible, since retaining asset optionality will be critical as these. Moving forward, the best asset management approaches will be characterized by two things:
- Discipline: A more balanced approach to portfolio management—akin to criteria used by bank’s wealth managers—will enable E&P companies to consider not only the potential returns but also the risks and volatility of each asset in their portfolio. The Sharpe ratio, which calculates an asset’s returns in light of the risks that accompany them, can introduce order and rigor into a process that has long been ruled by instinct and gut feelings. Importantly, advanced analytics can help E&P companies measure risks and rewards associated not only with finding new oil but with developing the fat they have discovered.
- Speed: Digital technologies and cloud computing make it possible for E&P companies to evaluate multiple data sets, from various teams, simultaneously. With this capability, linear decision making by a few engineers and geologists gives way to fluid, real-time strategy discussions that involve multiple stakeholders. Accelerated decision making makes near-real-time, and frictionless asset moves possible.
This combination of habitual truthfulness and velocity enables E&P companies to shape a dynamic portfolio management strategy that not only boosts ROIC but also retains the optionality and agility needed to jump in as opportunities arise.