Upstream Risk Analysis and Portfolio Management: A Language that Communicates to the Investment Community

Henry S. Pettingill and Gavin H. F. Ward
Noble Energy Inc, Houston, TX

Investment professionals are aware that more and more leading E&P companies are employing probabilistic Risk Analysis and Portfolio Management, often linked to improved performance.  As investment professionals have become familiar with this approach, it has become a “language” that allows technical professionals to communicate to investors.  Specifics of this common “language” and how E&P companies can use it to balance their own needs with those of their investors include:

• The timeframe of predictability.  Whereas public companies have a quarterly earnings horizon, a typical low-risk exploration program has a minimum one-year timeframe of predictability. 5-year horizons are typical for frontier exploration.
• Knowing and communicating the role each project (or group of projects) plays in the portfolio, what it contributes to the bottom line, and over what timeframe.
• Describing a range of outcomes for projects and portfolios, clearly communicating a base “promise” along with reduced expectations for high-risk ventures (avoid downside surprises, allow upside surprises).
• Identifying a portfolio's gaps with respect to meeting metrics, then showing a plan to plug the gaps, including what types of projects are needed.
• Exercising capital discipline through a portfolio of quality projects and sound selection criteria.
• Demonstrating that the portfolio is diversified yet focused enough to avoid dilution of resources to the point of jeopardizing success.
• A postmortem process that demonstrates that predictions are calibrated based on past ability to achieve them.  Investment professionals look to past financial data to support their predictions, so they understand that geoscientists and engineers who look at their past performance are more likely to deliver.  This includes identifying and fixing specific areas of weak technical performance.

Specific case examples demonstrate how each of these communication steps can build investor confidence.

AAPG Search and Discovery Article #90039©2005 AAPG Calgary, Alberta, June 16-19, 2005