Monday 21 August 2017

"Winners" and "Losers" with a LFE* oil price

When discussing future oil prices, some CEOs seem to have moved on from ‘Lower for Even Longer’ to ‘Lower into the 2020’s’ to ‘Lower For Ever (*LFE)’.

Compared with the late 1990’s, this period of low oil prices has not yet seen a huge amount of consolidation – debt re-structuring, yes – but not outright acquisitions.

Exploration Performance in the 1990’s as a cause of ultimate demise!

It is said that banks and funds invest at least as much in the management teams of small exploration companies as in the actual prospects they are shown.

And therefore it is still common to read, in a company’s prospectus, that “X and Y were part of Z Oil’s widely respected and highly successful exploration team” or similar.

It is worth recalling that exploration is in general a game in which there are a few “winners” and very many “losers” and that in fact those that “lost” in exploration in the 1990’s were generally on the receiving end of consolidation at the end of the decade; this has been thoroughly documented by consultants such as ADL, Wood Mackenzie and others.

An example of these real differences in performance is shown in Figure 1 (a ‘classic’ exploration performance benchmarking display, showing reserves replacement as a percentage on the vertical scale and Finding Cost in $/boe on the horizontal).

Figure 1

What happened to Arco, Amoco, Mobil, Phillips, Texaco and Enterprise? Burlington, Kerr McGee, Unocal, Norsk Hydro? Gone!

What is my point?
It is that it is performance that ultimately decides the destiny of companies, not conspiracies - although I hear some Discussion Boards (e.g. the one on Premier Oil) believe something different!

And that over time, companies (have to) reveal enough about their actual, as opposed to promised, performance for investors to be able to see the truth. And for Executives to figure out their position relative to their competitors – and, if necessary, do something about it before it is too late.


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