A petroleum company's asset portfolio and capital allocation practices are leading indicators of future performance.Understanding the company's opportunity portfolio's maturity in conjunction with embedded core competencies, gives management a quantitative tool to allocate capital between exploration, development, sales and acquisition.This article uses fifteen companies' publicly reported, historical performance data to test the predictive ability of a multidimensional model of investment portfolio management (SPE82006).The suite of companies includes acquirers and acquirees, as well as those who grew organically over the last two decades.The article reports on a refined model framework and demonstrates its predictive abilities.
Asset portfolio management offers the opportunity to manage the performance of a company and reduce its earnings risk.Historically, the industry's earnings performance has been a sequence of highs and lows.These highs and lows have typically been associated with the cyclicality of supply and demand.Confidence in a company's earnings is reflected in the company's market capitalization (number of shares times share price.)Higher market capitalization is the ultimate goal of senior management.
In a previous analysis of oil and gas asset portfolio management, it was demonstrated that, for the period from 1980 through 1996:
a company's market capitalization is highly correlated with the asset portfolio size ;
asset portfolios have lifecycles closely related to the company's R:P ratio;
position in the lifecycle can be monitored using annual SMOG and reserve replacement data;
companies explore and acquire according to the asset lifecycle and the needs of their inventory.
While these observations were well-supported by the data for large, vertically-integrated oil and gas companies within the timeframe of study, the industry has experienced radical structural changes, the maturation of historically significant petroleum provinces and access to new provinces.New provinces, with giant and super-giant accumulations, have become accessible through changes in geopolitical alignments as well as new technology.
The significant findings of the previous study encourage further investigation with a database of companies spanning size and geographic focus across the timeframe of the recent industry consolidation.In particular, the analysis addresses the continuity of the guidance provided by reserve inventory size for predicting market capitalization and the use of the Standardized Measure of Oil and Gas Accounting (SMOG) in evaluating portfolio management practice within a company.A specific goal is the determination of a company's long-term viability.The analysis metric for this determination is the disposition of the company at the conclusion of the recent industry consolidation phase, i.e., did the company survive or did it merge and, in the case of survivors, was the health of their inventory indicative of their consolidation period behavior.