Admittedly, it’s easy to say what to do during the next peak
when in the midst of a downturn, but what should E&P managements do now? If your company has real questions of survivability due to having too much leverage and not enough liquidity,
then maintain the extreme austerity policies you undoubtedly
already are pursuing. If, on the other hand, you are one of the
management teams that has adequate financial flexibility, now
would seem to be a very good time to invest. Everything from
acquiring reserves to exploration and development expenditures
are much cheaper than they were a few years ago and it is very
likely that investments now will look very impressive when
looking back from a higher commodity price plateau.
For those seeking to embrace these principles, we recommend planning and decision-making be more rules-based to
mitigate innate management biases. Performance measurement
should be more driven by absolute results, rather than results
against budgets, and should incorporate a true balance of growth
and return. Those that invest more when commodity prices are
low will tend to have strong growth and return improvements
in the next up-cycle, which is likely to drive better TSR.
And if you do step up investment, don’t become too obsessed
with the immediate reaction of investors. If the market doesn’t
respond positively when these investments are announced,
don’t sweat it. Over time there will eventually be an up cycle
and sound investments now will likely help fuel stronger TSR
over the next three to five years. Do you think Warren Buffet
worried about the stock market’s reaction when he announced
the investment of $34 billion to buy the Burlington and Northern
Santa Fe railroad in 2009? We don’t think so.
ABOUT THE AUTHORS
Gregory Milano is founder and CEO of Fortuna
Advisors where he is the strategic team leader on
all client engagements and leads research and
product/service development aimed at clarifying
the shareholder value implications of capital deployment strategies and the tradeoff between maximizing returns and investing in growth.
JinBae Kim is a Senior Associate of Fortuna Advisors, specializing in modeling the financial and
shareholder value impact of strategic business
decisions including organic investment, M&A, share
repurchases, and dividends. He performed the
research discussed in the article.