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Driving Value in Upstream Gas
Brian Cooke Consulting Partner 8th November 2013
Industry Briefing
PwC Brisbane
November 2013
pwc.com.au/industry/energy-utilities-mining
PwC 2
Driving Value in Upstream Gas
Substantial capital investment is needed if the upstream oil and gas sector is to meet the growing demand for energy . This paper examines the ability of companies in the upstream Oil & Gas sector to deliver value to shareholders on this large future investment.
We have done this by identifying the top performing companies, as measured by their return on capital employed (ROCE), and isolating the key characteristics that enable them to deliver returns over and above that of their peers.
The study excludes the midstream (processing and refining) and downstream (marketing and distribution) activities of the companies included in the study.
The companies selected for analysis are the Top 100 global Oil & Gas companies based on total assets in the latest published financial statements as at December 2012. A total of 26 companies were removed from the sample if upstream operations were insignificant or published data on key financial or operational metrics was not available. The sample for the study comprises 74 of the largest global Oil & Gas companies.
PwC acknowledges Evaluate Energy, who provided the required operational and financial data for this study. The findings in the study are based on PwC’s analysis of the Evaluate Energy Data.
PwC
Megatrends are driving fundamental demand for energy As populations and economies grow, so to will the demand for energy increase.
Global Population Growth Global Energy Consumption
• Global population is forecast to grow by 25% in next 30 years.
• 75% of that population will live in either Asia or Africa.
Sources: ExxonMobil – The outlook for energy: A view to 2040; OECD ECONOMIC OUTLOOK, VOL.2012/1, U.S. Energy Information Administration (EIA) 3
• Global energy consumption projected to grow by 1.6% per annum up to 2030.
• 36% growth – solely driven from the Non-OECD economies.
3.79
1.24
0.890.93
4.59
2.11
0.901.13
+70.2 %
+21.1 %
Asia Pac MEA Europe
& CIS
Americas
2040
2010
5.53 5.60 5.73 5.80 5.84
+5.6 %
+36.2 %
OECD
Non-OECD
2030
10.88
2025
9.95
2020
8.97
2015
7.77
2011
6.75 6.9 6.9
5.1
3.0
2031-50 2012-17 2018-30
2.1
2001-07
2.0 1.9 2.2
Non-OECD
Total OECD
Global GDP Growth
• Projections of global GDP growth indicate an expected growth of between 3.3 % p.a. from 2013 to 2030.
• Non-OECD economies will drive this growth.
PwC
Shareholder Value & stock market performance Oil & Gas stocks outpaced the global stockmarket between 2000 – 2013
Source: S&P Capital IQ, PwC Analysis 4
0
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
MSCI - World Oil,Gas & Fuel Index
MSCI - World Index
3.3% CAGR
10% CAGR
PwC
Top performers significantly outperform Upstream / E&P Average Returns on Capital employed (2006 – 2012)
5
Capital Productivity is defined as revenue generated per $ capital employed
Rank Top performers Based in Total Assets
(US$m)
Upstream
ROCE (%)
Upstream
Operating Margin
Upstream Capital
productivity
1 Ecopetrol Colombia $ 64,521 71% 55% 1.30
2 Statoil Norway $ 140,515 57% 63% 0.90
3 Total France $ 227,125 55% 66% 0.84
4 ENI Italy $ 184,578 47% 54% 0.88
5 PTT Thailand $ 53,747 46% 87% 0.53
6 Shell Netherlands $ 350,294 42% 57% 0.75
7 Chevron United States $ 232,982 42% 55% 0.75
8 PDVSA Venezuela $ 218,424 41% 30% 1.36
9 Imperial Oil Canada $ 29,464 40% 63% 0.64
10 Inpex Japan $ 32,566 40% 63% 0.63
11 BHP Billiton Australia $ 129,273 39% 55% 0.70
12 Novatek Russia $ 15,215 37% 59% 0.63
13 MOL Hungary $ 21,696 37% 60% 0.62
14 PetroChina China $ 344,207 35% 41% 0.87
15 Marathon Oil United States $ 35,306 34% 59% 0.58
16 OMV Austria $ 40,340 33% 42% 0.79
17 CNOOC China $ 72,379 32% 53% 0.60
18 Petrobras Brazil $ 331,645 32% 47% 0.68
19 ExxonMobil United States $ 333,795 32% 34% 0.93
Top performers average 38% 54% 0.75
Industry average 21% 38% 0.51
PwC
Capital Productivity is defined as revenue generated per $ capital employed 6
-20 %
-10 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4
Ave
rage
Op
era
tin
g M
arg
in
Average Capital Productivity
ExxonMobil
Petrobras
CNOOC
OMV
Marathon Oil
PetroChina
MOL
Novatek
BHP Billiton
Inpex
Imperial Oil
PDVSA
Chevron
Shell
PTT
ENI
Total
Statoil
Ecopetrol
Other
Top performers
Top performers significantly outperform Upstream / E&P Average Returns on Capital employed (2006 – 2012)
0
Bottom Quartile
(9%) Top Quartile
(32%)
PwC
Capital Productivity is defined as revenue generated per $ capital employed 7
-20 %
-10 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100 %
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4
Novatek
BHP Billiton
Inpex
Imperial Oil
Average Capital Productivity
Ave
rage
Op
era
tin
g M
arg
in
ExxonMobil
Petrobras
CNOOC
OMV
Marathon Oil
PetroChina
MOL
PDVSA
Chevron
Shell
PTT
ENI
Total
Statoil
Ecopetrol
Gas dominant companies did not perform as well Returns on Capital employed (2006 – 2012) by production profile
Bottom Quartile
(9%)
Top Quartile
(32%)
Gas Dominant
Mixed Portfolio
Oil Dominant
0
PwC
Gas company underperformance driven by pricing pressures Evidenced by the delinking of North American gas prices from crude pricing.
Source: PwC Analysis 8
0
2
4
6
8
10
12
14
16
$-
$20
$40
$60
$80
$100
$120
$140
Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013
Ga
s -
He
nry
Hu
b (
$ / b
tu)
WT
I ($
/ b
bl)
Henry Hub and West Texas Intermediate Prices, 2005 – 2013
Spot Oil Price: West Texas Intermediate
Natural Gas Price: Henry Hub, LA
PwC
“There has been an exponential growth in upstream capital expenditure in the past 7 years.”
9
PwC
Upstream capital expenditure has risen exponentially. Production growth stagnates at 6.5%, while capital expenditure grew 72%.
10
22,95722,85122,995
21,97122,06021,829
21,538
320
2006
336
511
419
2009
352
2010 2008 2007
526
+72.6 %
2012
580
2011
+6.6 %
Capex ($ bn)
Production (mmboe)
PwC
Global capital expenditure reached $580 billion last year. The study participants spent more than $3.1 trillion in exploration and development capex since 2006.
• Upstream capital expenditure grew 13.5% in 2012,.
• Over the 7 years studied, it has grown 72% and is strongly correlated with oil prices.
• However, the velocity of this growth is slowing and has fallen from 0.38 to 0.30 in 7 years.
• The slowdown in velocity of capital commitments, indicates heightened capital discipline within the sector.
• North American are redirecting spending from gas to oil and liquids-rich plays.
• Gas dominant companies and those with limited oil acreage have slowed CAPEX spend ruthlessly.
Capital Velocity is the ratio of CAPEX to Capital Employed. It is PwC’s proxy for measuring an
organisation’s growth agenda in capital intensive industries.
11
0.300.28
0.31
0.370.38
2011
511
2010
526
2009
352
0.24
2008
419
2007
320
0.30
2006
336
2012
580
-3.9 %
Capex ($ bn) Capital Velocity (x times)
PwC
Differentiators of Value
The three factors we believe best explain the differences in performance are:
1. Selectivity not velocity in their approach to capital investment – it’s
not about how much you spend but what you spend it on that counts
2. A commitment to driving capital productivity – top performers are on average almost 47 % more effective as their peers in terms of capital productivity.
3. A strong focus on operating excellence – companies in the top quartile
had production costs almost 10 % lower than the industry average
12
PwC
Capital Velocity is the ratio of CAPEX to Capital Employed. It is PwC’s proxy for measuring an organisation’s growth agenda in capital intensive industries.
13
-10 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Average ROCE
Average Capital Velocity
The rate of capital investment does not drive value Growth does not necessarily generate value, equally - rationing capital to minimise risk can lead to value opportunities being overlooked.
Pursuit of Growth
Pu
rsu
it o
f V
alu
e
0.028
Correlation
Coefficient
PwC
Capital Velocity is the ratio of CAPEX to Capital Employed. It is PwC’s proxy for measuring an organisation’s growth agenda in capital intensive industries.
14
-10 %
0 %
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70
Ecopetrol
Shell Chevron PDVSA
Imperial Oil
Average ROCE
Inpex BHP Billiton
MOL PetroChina
Marathon Oil OMV
CNOOC Petrobras
Novatek
ExxonMobil
Average Capital Velocity
PTT ENI
Total Statoil
Selectivity not Velocity drives value Top performers show a positive relationship between returns on capital generated and their pursuit of growth.
Top Performers
Other
Pursuit of Growth
Pu
rsu
it o
f V
alu
e
0.028
0.417
Correlation
Coefficient
PwC
Differentiators of Value
The three factors we believe best explain the differences in performance are:
1. Selectivity not velocity in their approach to capital investment – it’s
not about how much you spend but what you spend it on that counts
2. A commitment to driving capital productivity – top performers are on average almost 47 % more effective as their peers in terms of capital productivity.
3. A strong focus on operating excellence – companies in the top quartile
had production costs almost 10 % lower than the industry average
15
PwC
Capital productivity is a general industry issue The decline in upstream productivity is as consistent amongst the top performers as well as the industry as a whole.
* Capital Productivity is defined as $ revenue generated per $ capital employed.
16
• Despite production increases, the industry has been less than efficient in its use of capital.
• Trend not likely to revert anytime soon, as exploration to discover reserves is being pushed to deeper water and frontier regions.
• Unconventional reserves whilst largely easier to discover, the development infrastructure (gathering, pipelines, cleansing and compression facilities) significantly add to the development costs.
0.640.54
0.64
0.37 0.400.46 0.42
0.78
0.87
0.76
1.02
0.880.92
2006 2007
0.66
2012 2011 2009 2010
47%
2008
Top performers average* Industry average
PwC
Capital productivity is a general industry issue Production (boe) per $’000 Capital Employed (Real $ Terms)
Unit Productivity - Production (boe) per $ Capital Employed (in nominal terms)
17
25
20
15
10
0
Pro
du
ctio
n (
BO
E)
pe
r $
Ca
pita
l E
mp
loye
d
2012
9.56
2011
9.99
10.35
9.15
2010
11.79
11.84
2009
14.43
13.45
2008
15.84
15.01
2007
19.13
17.70
2006
23.18
21.59
• The industry has been less than efficient in its use of capital.
• 55% less output per unit of capital employed today in comparison to seven years ago
• Trend not likely to revert anytime soon, as exploration to discover reserves is being pushed to deeper water and frontier regions.
• In Australia, the recent wave of investment will near completion, resulting in large scale construction teams rapidly downsizing to smaller operational workforces
• The shift from a project mentality to a reliable and efficient operating rhythm will necessitate a large cultural shift in many instances.
Top Performers Industy average
PwC
Finding and developing reserves increasingly more expensive F&D costs ($ / boe 1p reserves added) on a 3 year rolling average.
• F&D costs takes all exploration, development and acquisition costs and divides by the proved reserve additions (net revisions, extensions, discoveries and acquisitions)
• A 3 year average is used to minimise annual fluctuations and lag times between costs and discoveries.
• Given heightened revenue pressure in the gas sector, this is the only sector to show improvement in F&D costs.
• As “cheap” oil and gas becomes increasingly more expensive to develop, improved F&D costs are unlikely to eventuate.
* We converted gas volumes into energy equivalent barrels of oil using an average factor of 6,000 (i.e. Six thousand cubic feet of gas equals one barrel of oil equivalent)
18
$11.67
$15.62
$11.89 $10.73
$15.17
$9.46
$17.05
$14.29 $14.36
+10.3 %
oil dominant
$19.10
$8.68
$11.80
gas dominant
+2.9 %
mixed portfolio
$17.29
$14.90
$13.35
-6.8 %
2011 2010 2009 2008 2012 CAGR
PwC
Differentiators of Value
The three factors we believe best explain the differences in performance are:
1. Selectivity not velocity in their approach to capital investment – it’s
not about how much you spend but what you spend it on that counts
2. A commitment to driving capital productivity – top performers are on average almost 47 % more effective as their peers in terms of capital productivity.
3. A strong focus on operating excellence – companies in the top quartile
had production costs almost 10 % lower than the industry average
19
PwC
Lifting (production) Cost Profile Lifting Costs ($/boe) have grown at 9.7% p.a. since 2006
• Upstream sector as a whole has seen lifting (production) costs increase by a compound annual growth of 9.7%
• Collapse of oil prices from a high in June 2008 saw a renewed and rapid shift in focus to operating excellence and cost efficiency.
• This is the only period where the industry have managed to improve efficiency.
• Faced with declining gas prices, gas companies were more successful in controlling operating costs (6.8% CAGR)
• Top performers manage the demanding balance between risk, cost, and performance (availability and reliability).
20
$6.15
$15.10
$11.54
$21.82
25
10
15
20
5
Pro
du
ctio
n C
osts
($/b
oe
)
2012 2006
$8.47 $9.12
2007 2011 2008 2010 2009
11.2%
10.1%
6.8%
CAGR
Crude Prices Collapse June ’08 to May ‘09
gas dominant oil dominant mixed portfolio
PwC
Operational productivity uplift opportunity exists Lifting Costs ($/boe produced).
21
14.57
Predominantly
Gas
7.48
Predominantly
Oil
20.99 22.16
Mixed Portfolio
-5.3 %
-19.5 %
9.28
15.37
-5.2 %
Average Top Performer
• Performance gap in production costs cannot be explained away by differing production profiles
• We have found differentials of 5- 19% between top performers and industry average for well efficiency and production metrics.
• The opportunity to close this gap represents almost $22 billion in annualised value
• Top performers are learning organisations . … …. They realise that to drive down the cost curve they must first drive their people up the experience curve
Lifting Costs ($/boe) by production profile in 2012
PwC
Jock O'Callaghan National Leader Energy, Utilities & Mining Melbourne 61 (3) 8603 6137 [email protected]
Brian Cooke Consulting Partner Mining, Oil and Gas Brisbane 61 (7) 3257 8630 [email protected]
Authors
22
Other PwC Contacts
Steve Loadsman Consulting Partner Mining, Oil and Gas Brisbane +61 (7) 3257 8304 [email protected]
Wim Blom Deals Partner Mining, Oil and Gas Brisbane +61 (7) 3257 5236 [email protected]
Gui Capper Manager Energy, Utilities & Mining Brisbane 61 (7) 3257 8273 [email protected]
Matt McKee Senior Manager Mining, Oil and Gas Brisbane +61 (7) 3257 8168 [email protected]
PwC
Look out for the full PwC Australia report on 'Driving Value in Upstream Oil & Gas', available here – pwc.com.au/industry/energy-utilities-mining Twitter: @PwC_AU
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