The more acquisitive oil companies are the more they can be expected to underperform, says David Hobbs, director, E&P strategy, Cambridge Energy Research Associates. Hobbs has studied the performance since 1990 of 18 North America-based upstream companies with enterprise values of $500 million to $20 billion. "The more they spent, the worst they performed," Hobbs told attendees at the recent CERA annual conference in Houston. The most successful of the 18 companies has not done a deal since 1993; the least successful doesn't seem to know how to perform. "There are some drinkers who should never drink again." He wouldn't name names, though. The worst performer did not appear on his chart because it is "too depressing." The best performer is "very clear on what they did well, didn't try to do anything else and had a culture of discipline." That culture is bottom-up rather than management enforcing it down the ranks. Hobbs was head of business development for Hardy Oil and Gas, and was also with Monument Oil and Gas and British Gas. His study for CERA on the 18 companies' performance is nearly complete, he said. Some of his other findings and some advice: During budget crunches, E&P companies tend to cut capex plans that have the most value, rather than the least. While ventures in the deepwater Gulf of Mexico may be profitable at $12 oil, future spending and access to capital can be based on a higher price than this. It is irresponsible to not hedge. When valuing an acquisition, a company is taking an implicit bet on the futures market. Why not go ahead and make that bet? Decide what an asset is worth rather than what it will cost to win. Remember the "winner's curse." Be careful of "strategic investments" that are loss leaders that depend on having value because of future deals that will result. Oftentimes, the winner of a second, third or fourth bid in a new market is not the winner of the first, and the later winners get their deals a lot cheaper. Beware of thinking the grass is greener somewhere else. "What you don't know can hurt you." Consider whether selling your reserves may create more value than owning them. You can buy them back next year, if you like, and then sell them again at a yet-higher price. Watch that your aim for an "economy of scale" is not overcome by an "economy of strategy." And watch that your successful company does not lose its way: Some companies have it right until they merge or buy a company that lacks a culture of discipline, resulting in a dilution of its own discipline. There are two types of acquisitions that tend to not work: the Canadian trust model, which buys reserves without a lot of development potential; and company models in which an exploration portfolio is needed as part of a deal. "Acquisitions should be used as a means of accelerating exposure to an exploration portfolio that buys you time, rather than [profit] in their own right." As for timing a deal, "I don't think there is any moment when it's better or worse to make acquisitions." Instead, there are times when it is harder to make good deals. Bad deals are made when a company has money burning in its pocket "and certainly wouldn't want to give it back to shareholders. You never know when you're going to get it back." He found that the companies that outperform their peers are those that are prepared to say "no" more often than "yes." "There is an opportunity-cost and an opportunity-value," he concluded. "Once-in-a-lifetime opportunities really do come about-once in a lifetime." -Nissa Darbonne
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