Cochran, Michael D.¹
(1) Anadarko Petroleum Corporation, Houston, TX

ABSTRACT: A Delicate Balance

Both the goals and the characteristics of an E & P portfolio optimization differ from those of a stock portfolio. These differences are profound and add multiple dimensions of difficulty to optimizing E & P portfolios.
The goal of optimization of an E & P portfolio is sustainable, profitable growth, long term NPV. A stock portfolio optimizes short term NPV or ROR for a given uncertainty.
Investments in an E & P portfolio are marked by limited liquidity, limited fungibility, inability to rapidly change investments, cash flow lumpiness, and highly volatile product prices (cash flows).
The biggest difference, however, is the base decline of the E & P portfolio.
Each E & P portfolio has an inherent base production decline; if you don’t invest, production declines at a certain rate. Each portfolio requires a “maintenance capital” which takes a certain percentage of your operating cash flow. Depending on product prices “maintenance capital” can exceed operating cash flow.
The three critical parameters for sustainable, profitable growth are base decline, cash margins and replacement costs. Both growth and ROR are functions of these three.
Balancing an E & P portfolio, in addition to maximizing normal economic metrics, requires balance between ROR and growth in a world with volitile product prices. This delicate balance further requires that financial, business and personal or cultural issues are all identified and carefully considered in the final solution if portfolio results are to be translated into business performance.

AAPG Search and Discovery Article #90026©2004 AAPG Annual Meeting, Dallas, Texas, April 18-21, 2004.