Implementing Portfolio Management: Issues, Insights, and Answers? John I. Howell Portfolio Decisions, Inc. Roger N. Anderson Columbia Enterprise Systems.

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?


Why Implement Portfolio Management?

Because Current Performances are all over the Map!


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.


• “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:


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.


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.


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


Critical Success Factors: 2. The Strategy

Production

0

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200

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Reserves

0

500

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NCF

-200

-100

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500

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Expl Expense

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Net Income

-200

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600

800

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Capital

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1999 2002 2005 2008 2011

Strategy is how you define success (the target bars above)!


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


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


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.


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?


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?


Critical Success Factors: Decision Framing2. Clearly Define the Decision Criteria (cont)

Production

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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


Critical Success Factors: Decision Framing3. Generate Realistic Options

Does Project 16 contribute positive value, and how much?

Efficien

t Frontie

r


Critical Success Factors: Decision Framing4. Evaluate Options in terms of Decision

Criterion

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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?



Criterion (cont)Net Income

0

0.2

0.4

0.6

0.8

1

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2013

Net Cash Flow

0

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0.6

0.8

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2013

Capital

0

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0.4

0.6

0.8

1

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2007

2009

2011

2013

Production

00.20.40.60.8

1

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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

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2007

2009

2011

2013

Probability of meeting performance metrics/year?



Criterion (cont)

How bad can “poor performance” be?



Criterion (cont)Why is a project valued by the portfolio?


Generic E&P Portfolio


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.


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!


• 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


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!

Implementing Portfolio Management: Issues, Insights, and Answers? John I. Howell Portfolio Decisions, Inc. Roger N. Anderson Columbia Enterprise Systems.

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Implementing Portfolio Management: Issues, Insights, and Answers? John I. Howell Portfolio Decisions, Inc. Roger N. Anderson Columbia Enterprise Systems.