By Sam Cage & Daniel Canty
Unprecedented times in the oil industry bring unique opportunities.
And Maersk Oil is in a good place to potentially take advantage of some of these, according to its new CFO Graham Talbot. “We have set out clear expansion plans, with a target to grow production within our capability skill set, as long as we generate returns in excess of 10% on invested capital”.
“I don’t think I’ve ever seen this amount of portfolio restructuring in the industry in my career, it’s something that’s quite exceptional and unique at this scale,” says Talbot, who started in the role earlier this year, having previously held senior roles at Shell and BG Group.
The statistics reflect this sentiment. The aggregate value of oil and gas assets and companies up for sale in Wood Mackenzie’s mergers and acquisitions deal pipeline stood at a staggering US$331 billion in mid-September.
“With that comes opportunity, given that we are part of a conglomerate with a longer-term shareholder value focus than many other oil and gas companies.”
One of the major themes in the oil industry over the last 12-18 months has been diminishing returns, resulting in companies streamlining their portfolios and more assets coming up for sale. The difficulty of getting oil out of the ground now – whether due to deeper water, or reservoir type, and the techniques needed for extraction – means the process is proving to be a lot more complex, expensive and difficult to forecast. For companies, the technology now required is often new and that means more surprises, and generally more negative than positive.
That has led some industry executives and commentators to speculate that the industry will change fundamentally, due to the cost pressures and difficulty
of extraction, with the oil price becoming hyper-sensitive, as break even points are much higher. In short, there is a lot of change on the cards.
Cyclical by nature
Talbot who has travelled the world in the oil industry, including stints in London, Dubai, the Netherlands and Kazakhstan – and running multi-billion infrastructure projects in his native Australia thinks differently and that the industry remains in its usual cycle, but with a broader time spread between supply and demand adjustments and more moving parts influencing both elements.
"Needless to say, companies need to adjust to these uncertainties, and basics such as reducing portfolio risk and cutting back on capital commitments to reduce financial risk and return funds to shareholders are all valid responses. The other valid response is cost management. If you cannot materially influence your revenue line then you must focus on cost to ensure that you maximise margins and remain competitive both in terms of value delivery and as a partner of choice by resource holders," he says.
“I don’t think what we are seeing is a completely new reality, but certainly the range of economic pressures combined with the level of political and technical challenges point to something a bit more complex than we have perhaps seen in the past. Do I think it means the end of cyclicality we are used to - no. Are there new risks or opportunities inherent in not reading the signs and making tough choices – absolutely yes.”
“There is a reason people want to sell these assets. If we keep our eyes wide open to what those reasons are, and we can find a competitive advantage in how to manage those assets differently and extract additional value then great.”
Whether the industry is changing forever or not, the current state of the market is still something Maersk Oil can take advantage of. There is also an adjustment to the oil and gas industry’s traditional model of holding assets for the full chain of discovering assets, extracting then decommissioning. For Talbot, it is time to start looking at things differently.
He believes the focus should be clearly on the economics – rather than simply extracting as much oil and gas as possible, look at the bottom line of how much money is made on the barrels produced. This can mean buying into and selling out of operations rather than holding them for their full lifecycle, as well as looking at opportunities as an investor and putting faith in another company to run the operation.
“Many companies are looking to more “active portfolio management” as a response to the changes in the industry. This is often easier said than done, we often build an emotional attachment to the assets in our portfolio, this is understandable but can sometimes make it hard for people to make the tough decisions to either shut them down or sell them if this delivers the best value for the company. Personally my primary interest is... Can we make money out of it – safely and responsibly - that’s the question,” Talbot says. “We’re in the business of making money and therefore, getting barrels out of the ground is pretty important, but you have to be able to get them out profitably. “
A mid-sized company like Maersk Oil has to take carefully calculated risks to grow and this can mean working as an investor in fields which others operate, or getting involved at a point when others are hesitant.
“As an industry we’ve never really learnt that if everyone invests at the same time when commodity prices are high it pushes up costs. This in turn reduces returns and then when commodity prices soften everyone stops investing and costs come back down. That then leads to improved returns on projects and investment returns to the market and the cycle starts over again. As an industry we seem to do it year after year," Talbot says.,” Talbot says.
“That’s an area where we are uniquely positioned – we can be somewhat countercyclical and contrarian in the market in terms of our portfolio,” he adds. “We are a valid player in the market and we have a good balance sheet through the Group. We have money to invest. We have very clear intentions around growth.
“So, it’s a matter of finding the right things at the right price which strategically match up with what we want to do and how we want to grow.”
The Jack - St Malo FPU moored in location in the U.S. Gulf of Mexico. Image: Chevron.
Maersk Oil is engaged in exploration activities in the Kurdistan Region of Iraq (pictured).
Talbot draws a parallel between process and outcomes away from number crunching:
“A while ago I climbed Mount Aconcagua in the Andes. It’s the highest mountain in the western and southern hemispheres and the summit sits just under 7000m. Many people, especially on the first attempt, fail to reach the summit. By planning everything rigorously and to the finest detail, and training for a year in advance, I was able to achieve my goal. In that sense, the implementation of the optimum process directly influenced the outcome - making it to the summit and back alive! It should involve less physical stress, but that’s what getting SAP right is all about. Embrace the process now and the desired outcome will follow.
The three letters S-A-P generally attract strong responses from people. As a newcomer in Maersk Oil CFO Graham Talbot recognises the considerable distance travelled on the business improvement journey but sees scope for further change.
SAP is an Enterprise Resource Planning (ERP) system and the real value comes from the integration of processes across the business. Although SAP does have several pure finance modules it also has a lot of other functionality which needs to be owned and developed by the respective business areas.
Successful implementation of SAP can be extremely difficult, I have been involved in several implimentations, some good and some not so good. The big lessons I have learnt are (1) Minimise customisation, and (2) Do not under invest in change management.
So in the context of my climb, create a plan and stick to it and invest heavily in training.
“My challenge to people is: don’t get down on SAP, in fact don’t even focus on SAP – focus on the value that comes out of the process. What is the most efficient way of executing a process and what tools do I need to execute it? SAP will most likely be part of that toolkit,” Talbot says.
“I want people to be a bit more proactive around this and work towards a culture of continuous improvement in Maersk Oil. I want people to feel that they own the process, not SAP is the process and it’s driving them. We need to change that around. We are experiencing growing pains. We are past the point where we can do everything ad hoc. You need to be able to allocate capital, execute projects, measure performance and manage staff, consistently across the organisation that’s not optional.”