Many companies devote considerable attention and effort to portfolio optimization. Yet most of the literature and experience tells us that shareholders will not pay a premium for diversification and that investors mostly prefer pure plays. Diversification, vertical integration and hedging help companies level earnings and cash flows through economic cycles. The improved stability assists with various stakeholder relationships and lowers debt, salary and transaction costs. However, risk mitigation comes at a price. Does it provide a positive net value to the shareholder?

Models of a large petroleum project, its parent company, and a typical investor household provide a way to estimate portfolio management's contribution to shareholder value. The core question in optimizing a company's asset and investment portfolios is: What should we be maximizing to best serve stockholder interests?

This paper describes the modeling approach and the results of simulating various portfolio characteristics. Three perspectives are examined: (1) owning related vs. independent business units, (2) owning a business whose performance is correlated to the stock market, and (3) hedging product prices. These strategies are valued from the stockholders' perspective. The simulation results provide support in designing corporate decision policy, including choice of the present value discount rate.

Keywords:
stockholder, projection, abc corporation, capital, investment, assumption, diversification, spe 82031, market analysis, investor
Subjects:
Asset and Portfolio Management, Risk Management and Decision-Making, Strategic Planning and Management, Energy Economics, Information Management and Systems, Portfolio analysis, management and optimization, Project management, Market analysis /supply and demand forecasting/pricing, Artificial intelligence
Copyright 2003, Society of Petroleum Engineers
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