Strategic portfolio management: Applying a capabilities lens to manage the E&P portfolio

Strategic portfolio management: Applying a capabilities lens to manage the E&P portfolio

Executive summary

With oil prices stuck at low levels for the foreseeable future, 
exploration and production (E&P) companies must increase their 
productivity. Some E&P companies have already shown they can do 
this, driving up their production even as their capital spending has 
declined. Others have had a harder time, a fact reflected in their falling 
production numbers.
As E&P companies adjust to the new price environment, they could 
benefit from strategic portfolio management. Strategic portfolio 
management is a framework in which analytical tools and a set of 
clearly defined ongoing meetings are used to identify which assets, 
programs, and wells E&P companies should invest in. It encourages 
companies to make all of their decisions using a capabilities lens. At a 
time of severe capital constraints, strategic portfolio management keeps 
E&P companies on track by doubling as a control mechanism and a 
significant booster of performance.

Low prices require a new 
approach

Oil prices have declined by nearly 60 percent since the summer of 
2014 — a crash caused by a supply–demand imbalance that has often 
exceeded a million barrels a day. Oil prices got a reprieve of sorts 
early in 2016, recovering from their lows in the mid-US$20s. But the 
fundamentals of the market suggest that oil prices will probably stay 
low for years. 
Unconventional exploration and production (E&P) companies have 
responded to the lower prices by drastically reducing their capital 
spending plans and exiting or divesting noncore assets. As of mid-2016, 
the capital spending plans of medium to large E&P companies had 
declined by 65 percent from their November 2014 peak. North 
American rig activity was down by 79 percent over the same period. 
The lower prices have led to a focus on capital deployment, and 
productivity in the E&P industry as a whole has started to improve. 
But the productivity gains haven’t been achieved by every company. 
Some companies have done a better job of adapting to the low capital 
environment than others, as shown in Exhibit 1, next page, which 
compares 13 companies with significant North American exposure that 
appear in the database of research firm Global Data.
A discipline that every E&P company should be looking at during this 
time of low oil prices is strategic portfolio management, which ensures 
that all critical decisions tie back to the company’s overarching 
corporate strategy and differentiating capabilities (see Exhibit 2, page 7). 
Strategic portfolio management helps E&P companies address four 
common problems. The first is a misalignment between strategy and 
everyday capital allocation. Many E&P companies excel at allocating 
capital at the well level. But the capabilities they invest in often aren’t 
aligned with their corporate strategies, and don’t fit either the basins 
where they operate or their management models.
A second problem in the E&P industry is an inability to quickly adapt 
to market changes, which often results from vague decision rights 
and faulty capital reallocation processes. A third problem is a lack of

Strategic portfolio management: Applying a capabilities lens to manage the E&P portfolio