Is there more than one path toward long-term value?

Portfolio strategy is a critical lever for generating returns and accelerating the energy transition.

Three questions to ask:

• Do you have the right data to regularly, assess, measure and make informed decisions about your businesses and assets?
• Does your portfolio strategy account for how industry trends and potential futures will positively and negatively impact your business?
• Where do your strengths and strategies best align with opportunities in the alternative energy value chain?

How can oil and gas companies create value today — while preparing for tomorrow’s energy transition?

This tightrope walk is a central theme for the industry and among its financial community. Investors are putting pressure on companies to show how they are responding to the energy transition and their balance of capital investments in core businesses and renewables.

Creating and executing a path forward around two lenses — today and tomorrow — is a significant challenge. A constantly evolving portfolio strategy is integral to the approach. But what will that look like in oil and gas? And how will leaders and laggards be defined by it in the coming months and years?

Enhance today’s portfolio to increase efficiency and improve ESG ranking

Even before the COVID-19 pandemic — and the resulting drop in oil and gas demand — companies were reshaping their portfolios to improve financial performance, primarily in response to lower commodity prices. But those efforts gained new urgency in 2021, as CEOs saw M&A as an accelerant for strategic growth. Such level of activity may continue in 2022, especially around improvements focused on increasing operational capabilities and acquisitions that can potentially improve a company’s ESG ranking.

Portfolio optimization should include activities such as high-grading processes and utilizing talent and digital approaches to advance operational excellence and enhance workforce efficiency. Digital tools — and skilled employees to utilize them — can help companies lower general and administrative costs while maintaining rigorous health, safety, security and environmental protocols.

Further, portfolio changes play a role in longer-term decarbonization efforts. Divestment of fields that require significant energy usage to spur production, for example, can improve a company’s overall emissions levels and deliver ESG benefits, as can shifts to a portfolio that is more heavily weighted toward natural gas. The importance of ESG as a long-term value driver has become apparent in an EY 2022 CEO survey where 82% of US CEO dealmakers factored it in their sustainability strategies. Following the example set by EU, ESG is getting closer to the center of their risk radar.

Accelerate toward tomorrow with strategic investments to enhance the transition

It’s clear that a driver of energy M&A in the years ahead will be the need to enter new businesses or acquire assets to maintain competitiveness in a transitioning marketplace — which will likely include those outside the traditional energy industry. In fact, 60% of US CEOs surveyed will be actively pursuing acquisition this year.

To determine their roles in this future marketplace, oil and gas companies need to form their own views, or look to industry experts, to determine what the future holds with regard to economic growth, carbon pricing, consumer choice, changes to transportation and power generation demand, and the expansion of alternative energy sources. Based on these forecasts, companies can project their capital expenditures and asset returns and ultimately determine the outlook for their current portfolios — or a potential portfolio — based on a broad range of futures. This approach will inform their transaction, asset and divestiture strategies on a recurring basis.

Additionally, companies need to be intentional about what parts of the alternative energy value chain in which they choose to invest. For example, oil and gas companies can respond to changing expectations by acquiring firms involved in emerging sectors, such as carbon capture and storage, hydrogen production and geothermal technology. There are also opportunities in the fast-growing electric vehicle market. Services such as public charging stations and battery swapping management, customer apps and point-of-interface technologies, electric vehicle financing and leasing, and fleet management can give oil and gas companies an entrée into new markets and help balance the new with the old. 

However, every energy (including alternative energy) project has well-defined roles, and each one carries different risks and rewards. As oil and gas companies consider their roles in the energy transition, they’ll need to ask: where do our assets and skills align with future opportunities in the alternative energy value chain? Only a few will be a good fit for the skills that they already have (or can readily acquire or extend) and carry risks that they are comfortable managing.

Leading companies are looking to their investor relations teams to confirm that the investing community recognizes these shifts in strategy and understands how key performance metrics are changing.