Guest Article


Risked Portfolio Valuation Written by Jason Ambrose (Founder) and Bart Willigers (Principal Consultant), Palantir Economic Solutions


The challenges currently faced by E&P industry are unparalleled. The industry is facing a business environment of highly volatile hydrocarbon prices, increased pressure to minimise cost structures, diminishing U.S. and European investment opportunities, a shrinking experienced workforce and a cautious capital market. The combination of all these recent developments provides a compelling reason for managers to implement more effective technologies for allocating capital and improving the overall quality of E&P investment decisions.


A prerequisite for successful corporate management is an in-depth understanding of business performance. This insight is provided by the development of a corporate roll-up or consolidation of the past and expected performance of all assets owned by a firm. By taking a portfolio view, managers are able to create judgments on future performance and assess the exposure faced by an organization. This will ultimately drive the development of a corporate strategy and high-level decision making.


In a survey by Booz, Allen and Hamilton that preceded the turbulent market development of 2008 and 2009, leaders of twenty oil & gas companies expressed dissatisfaction with current risk management processes and a desire for change (McKenna et al., 2006). McKinsey interviewed over 1,000 corporate directors, 76% of which stated that they want to spend more time on strategy and risk management (Roberts, 2005). Only 11% of the directors indicated that they have a satisfactory understanding of the risk exposure of their companies, whereas 50% stated that they lack the data to track corporate risk exposure over time.


This lack of insight into the effect of unforeseen events on corporate performance can be catastrophic for those companies and can be partially attributed to the methods and processes used to determine the economic value of the company’s assets.


The Boston Consulting Group reported that many energy companies simply ignore uncertainty and risk and that project decisions are based on deterministic evaluations (Balagopal and Gilliland, 2005). Clearly, if the economic impact of uncertainty is not assessed at a project level, this information and the relevant insights cannot be communicated to corporate decision makers.


Although the oil and gas industry has started to realize the value of enhanced financial modeling (Bickel and Bratvold, 2007), most efforts to improve decision-making processes have focused on project management. Risking procedures such as decision tree modeling or Monte Carlo simulation are routinely applied in project management but are rarely applied at a corporate portfolio level. As a consequence, corporate decision making tends to be suboptimal.


Even though computing technology has been the cornerstone of portfolio management for several decades, present computing systems cannot handle the vast amounts of data generated in a Monte Carlo simulation of a large number of assets.


In this study, we discuss the risks and problems of current financial modeling techniques. A demonstration is given on the use of novel innovative financial software applications and their promise to optimize the workflow and operations in corporate planning processes. We describe the development of a risked portfolio and demonstrate the integration of data from varies databases and a financial analysis of this data using the PalantirSUITE®.


Calculation Auditing


For many economists in the E&P industry spreadsheet programs are the main modeling tool. Developed to execute “scratch pad” calculations, spreadsheet programs were never intended to execute the very large and complex calculations that are required in the planning processes of large corporate organizations.


Recent research has provided much insight into the errors that people make when they develop spreadsheets. Spreadsheets, even after careful development, contain errors in one percent or more of all formula cells. In large spreadsheets with thousands of formulas, there will be dozens of undetected errors (Panko, 1998). These error rates are in line with those reported in computer programming. However in computer programming, strict guidelines have been developed that eliminate most errors.


Surveys of spreadsheet developers indicate that spreadsheet creation, in contrast, is informal, and few organizations have comprehensive policies for spreadsheet development. Given that formal testing in spreadsheet development is rarely undertaken and because many errors may not be apparent, even significant errors may go undetected (Panko, 1998).


Drillers and Dealers :::


::: December 2011 Edition


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44