Implementing Portfolio Management: Issues, Insights, and Answers? John I. Howell Portfolio Decisions, Inc. Roger N. Anderson Columbia Enterprise Systems 1999 SPE Hydrocarbon Economics and Evaluation Symposium © Portfolio Decisions, Inc. 1999
Jan 05, 2016
Implementing Portfolio Management:
Issues, Insights, and Answers?
John I. Howell Portfolio Decisions, Inc.
Roger N. Anderson Columbia Enterprise Systems
1999 SPE Hydrocarbon Economics and Evaluation
Symposium
© Portfolio Decisions, Inc. 1999
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Three Issues for Consideration:
1. Why use Portfolio Management?
2. Who is the End User?
3. What are some Critical Success Factors for Implementing Portfolio Management?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Why Implement Portfolio Management?
Because Current Performances are all over the Map!
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
1. Why use Portfolio Management?
• Quantify volatility in performance,
• Test feasibility of strategies,
• Identify significant and detrimental projects,
• Define unique value of investments,
• Evaluate investment options, &
• Monitor business performance.
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
• “FIND THE ANSWER”!
• Instead, use it to make better Decisions,
• and Improve the Probability of consistently meeting your Strategic Goals.
Do NOT use Portfolio Management to:
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
2. Who is the End User?
• Portfolio Management relies on input and interaction with:– Geoscientists -Engineers– Planners -Portfolio Managers
• BUT, the end user is the Decision-Maker who is responsible for managing business performance.
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
3. What are some Critical Success Factors?
1. Establish a Clear Portfolio Process,
2. Set Commonly understood, Clear Strategy,
3. Develop Strong Relationships among key staff (the soft side), &
4. Always aim for High Quality Decision Framing.
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: 1. The Process
CaptureLearnings
Efficient Frontier
InvestmentOptions
Strategy
Project Data
Project Economics Database
Decision
Feasibility
Analyze Scenarios
BusinessIssues
Cultural Issues
Feedback Loops
INPUT OUTPUTANALYSIS SYNTHESIS DECISION
Copyright 1998-1999 PDI
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: 2. The Strategy
Production
0
50
100
150
200
1999 2002 2005 2008 2011
Reserves
0
500
1000
1500
2000
2500
1999 2002 2005 2008 2011
NCF
-200
-100
0
100
200
300
400
500
1999 2002 2005 2008 2011
Expl Expense
0
50
100
150
200
250
300
350
1999 2002 2005 2008 2011
Net Income
-200
0
200
400
600
800
1999 2002 2005 2008 2011
Capital
0
50
100
150
200
250
300
1999 2002 2005 2008 2011
Strategy is how you define success (the target bars above)!
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: 3. Relationships (The Soft Side)
Maps & ReservoirEconomics
Strategy & Goals
= Planning Staff &Portfolio Manager
= Engineers and Geo-scientists
Decisions& Business
Performance Monitoring
= The Decision-Maker
Dialogue
Discussion
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: 4. Decision Framing
• … since Portfolio Management doesn’t give THE answer, and
• … since decisions may depend on both quantitative and subjective inputs gathered from others (via relationships),
• How then do you put all the information together to reach clear and consistent decisions?
Answer: By Properly Framing the Decision
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: 4. Decision Framing
1. Clearly Define the Problem to be solved,
2. Clearly Define the Decision Criteria,
3. Generate Realistic Options, & only then,
4. Evaluate the Options relative to the Decision Criteria, &
5. Make Decisions.
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 1. Clearly Define the Problem
• Are you testing strategies, or defining/allocating performance targets?– Are you adjusting targets and constraints within a fixed project set?
• Are you evaluating project plans, or investment/divestment options?– Are you adjusting projects to meet fixed targets and constraints?
• Are you monitoring your business performance?– Are you computing probability of meeting targets with fixed projects?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing 2. Clearly Define the Decision Criteria
• Quantitative: – Does the Investment being discussed Contribute?
– Does the Project under consideration add Value?
– Does the Project improve the Probability of meeting performance metrics?
– How bad can “poor performance” be?
– Why is the Project Valued?
• Subjective:– What are the implications and tradeoffs for the investment?
– What are the political/commercial impacts?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing2. Clearly Define the Decision Criteria (cont)
Production
0
50
100
150
200
250
300
1999 2002 2005 2008 2011
Reserves
0
500
1000
1500
2000
2500
3000
1999 2002 2005 2008 2011
NCF
-400
-200
0
200
400
600
800
1000
1999 2002 2005 2008 2011
Expl Expense
0
50
100
150
200
250
300
350
1999 2002 2005 2008 2011
Net Income
-600
-400
-200
0
200
400
600
800
1000
1999 2002 2005 2008 2011
Capital
0
200
400
600
800
1999 2002 2005 2008 2011
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing3. Generate Realistic Options
Does Project 16 contribute positive value, and how much?
Efficien
t Frontie
r
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing4. Evaluate Options in terms of Decision
Criterion
0
200
400
600
800
1000
1200
3000 3500 4000 4500 5000 5500 6000
Value
Ris
k
With Project 16
Original Portfolio
Portfolio Value
Efficient Frontier Comparison
Does Project 16 add value? How Much?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing4. Evaluate Options in terms of Decision
Criterion (cont)Net Income
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Net Cash Flow
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Capital
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Production
00.20.40.60.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Original
w/ New Acquisition
Exploration Expense
00.20.40.60.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Reserves
0
0.2
0.4
0.6
0.8
1
1999
2001
2003
2005
2007
2009
2011
2013
Probability of meeting performance metrics/year?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing4. Evaluate Options in terms of Decision
Criterion (cont)
How bad can “poor performance” be?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing4. Evaluate Options in terms of Decision
Criterion (cont)Why is a project valued by the portfolio?
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Generic E&P Portfolio
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors: Decision Framing5. Make the Decision
• Quantitative Factors:
– Project 16 portfolio value is $250MM in a 5.5B portfolio, +
– Project 16 reduces risk for all portfolio values, +
– Project 16 improves probability of meeting near-term NCF and Net Income targets, BUT
– Project 16 guarantees failure to meet near term capital target,
– Project 16 inclusion reduces probability of meeting mid- and long-term reserves and production targets.
• Subjective Factors:
– Project 16 requires we maintain operations in an area we do not currently operate in, +
– Project 16 has no opportunity for expansion.
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Critical Success Factors5. Make the Decision
• Project 16 clearly adds value,• But, current price concerns suggest income and
cash flow summaries may be optimistic,• So, near-term improvements in income and cash
flow outweigh long-term degradation in production and reserves, &
• Lack of expansion opportunities is overcome with reduced dependence on exploration programs, so
• MAKE THE INVESTMENT!
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
• Uses Portfolio Management to improve the probability of consistently meeting your strategic goals.
• All portfolio information comes together at the Decision-Maker.
• Successful implementation depends upon process, strategy, culture, and in particular, proper decision framing.
Summary: A Perfect Implementation Environment
© Portfolio Decisions, Inc. 1999 1999 SPE HEES Dallas
Summary: A Perfect Implementation Environment
• A knowledgeable and engaged Decision-Maker +
• A well defined Business Strategy +
• Consistently described risk and uncertainty for all investments, +
• A clearly defined decision process!