Hedging Strategies Managing Risk and Uncertainty in the Oil and Gas Industry

Transcription

1 Hedging Strategies Managing Risk and Uncertainty in the Oil and Gas Industry Alfred A. Marcus Professor and Spencer Chair in Strategy and Technological Leadership University of Minnesota Carlson School of Management Strategic Management and Organization Department Minneapolis, MN USA

2 Research question: Strategies Major Oil And Gas Companies Use To Manage Risk And Uncertainty In Energy Prices? Price of Oil: Price of Natural Gas:

3 Decline in Exxon Mobil, BP, Shell, and TOTAL Revenue and Earnings:

4 Long-Term Investments.Uncertain Payoffs??? Future Fossil Prices Uncertain DEMAND Economy Climate Transport Renewables Efficiency DEMAND high low SUPPLY high BOOMS GLUTS (prices decline) low SHORTAGES (prices increase) BUSTS SUPPLY Shale Offshore Tar sands Security OPEC

5 What Can Happen in Question? Knight: Risk & Uncertainty Taleb: Black Swans Rumsfeld: Unknown Unknowns Hunches/Intuitions: Animal Spirits

6 Individual & Collective Biases Dominate Anchoring Recency Salience Availability Confirm Conservative Overconfident Suppress doubts Illusion of invulnerability Groupthink & consensus Insulation from criticism Promotion of dominant view Therefore, not likely to stray far from status quo?

7 HEDGE Sufficient backups to deal with imagined contingencies Provide safety if tipping point/inflection, Protect organizations regardless

8 HEDGE As public corporations legally accountable Must 1. take cognizance of risks and uncertainties 2. lay bare assumptions 3. show how hedged so can survive, if not thrive

9 HEDGE Compare 4 largest Exxon Mobil, BP, Shell, TOTAL In annual report, must 1. take cognizance of risks and uncertainties 2. lay bare assumptions 3. show heges so can survive, if not thrive

10 HEDGE ANALYSIS OF ANNUAL REPORTS Prior to Hedging Risks and Uncertainties Assumptions about the Future Operational Excellence Upstream Investment Downstream Integration High Impact R&D After Hedging Risks and Uncertainties Assumptions about the Future Operational Excellence Upstream Investment Downstream Integration High Impact R&D

11 Differences Exxon, BP, Shell, TOTAL Operational Excellence BP: Deepwater Horizon TOTAL: Health Safety Environment Charter ( Golden Rules Occupational Safety ) Upstream BP: divestment (Rosneft)/carbon pricing BP & Shell: biofuels Brazil Shell: BG (natural gas) acquisition TOTAL: Sunpower (solar panels), Saft (batteries),wind, biomass Hedging Of Oil & Natural Gas Companies Before & After Price Collapse Similarities Exxon, BP, Shell, TOTAL Operational Excellence: Continued strong focus on lowering injuries & enhancing safety Upstream: Greater discipline and selectivity in developing resources throughout world More emphasis on Asia/Pacific and natural gas

12 Hedging Of Oil & Natural Gas Companies Before & After Price Collapse Similarities Exxon, BP, Shell, TOTAL Downstream: Greater reliance on for earnings & revenue High impact R&D Slightly reduced emphasis Mostly related to fossil fuels, carbon capture, but some renewables Differences Exxon, BP, Shell, TOTAL Downstream BP: bulk of downsizing High impact R&D Exxon: petro-algae Shell: new energies venture arm (energy storage, smart grid, wind)

13 WHAT NEXT? EXXON MOBIL Continued Criticism on Climate Change and Renewables Not Preparing for Peak Oil Investing in Exploration Technology Emphasizing Shale Competing with Frackers Betting on Natural Gas Seeking a Russian Waiver Controlling Spending Cutting Back Investments Writing-Down Assets Bolstering the Internal Combustion Engine Missing Earnings Estimates

14 WHAT NEXT? BP Making Payments for Deepwater Horizon Acknowledging Peak Oil Demand Slowing Investment Driving Down the Breakeven Price Selling Assets Dealing with a Leak Using Super-Computers to Enhance Production Harvesting Wind Achieving Better Returns

15 WHAT NEXT? SHELL Conceding that Peak Oil Demand Was on the Horizon Investing in Renewables Conducting Asset Sales: a Low Price Environment Conducting Asset Sales: a Higher Price Environment Applying New Technology for Additional Oil Output Pursuing a Low Cost Breakeven Point Looking for Fracking Opportunities Fighting Off Charges of Bribery Fighting Off Charges of Earthquakes Working with Competitors on Fuel Efficiency and Pollution Reduction Increasing Earnings

16 WHAT NEXT? TOTAL Sensing Peak Oil Demand is Coming Betting on Electricity Investing in Iranian Natural Gas Finding Production Replacement Cutting Back on Diesel Promoting LNG Use Reducing Methane Emissions Achieving Comparatively Better Stock Market Performance

17 Change in Exxon Mobil, BP, Shell, and TOTAL Revenue and Earnings: Income and Revenue of Major Oil Companies ,000, ,000, ,000, ,000, ,000, ,000,000 50,000, ,000,000 Net Income Revenue Net Income Revenue Net Income Revenue Net Income Revenue Exxon Mobil BP Shell TOTAL

18 DIVERSE HEDGING STRATEGIES Different strategic outcomes Different shades of exploitation and exploration Exxon Mobil extreme exploit end of continuum BP next Shell next TOTAL extreme explore end of continuum