Specialization may drive higher returns

In 2013, the oil and gas companies that deliver premium value to shareholders won’t be the one-size-fits-all generalists of old.

“In 2013, generalists will be left behind,” said Christopher Click, partner at Booz & Co., a global management consulting firm.

Instead, the success stories will focus on specialization, emphasizing distinctive capabilities and pulling back in other areas.

“A capabilities-driven strategy can drive returns higher even as prices fall,” said Click, an author of a report on prospects for the oil and gas industry.

Click said highly integrated, diversified business models have characterized the industry for decades. Their weakness now is a tepid price outlook for oil and gas.

The model worked brilliantly during a time in which prices steadily rose. Click says that era that is over. No one expects barrels of oil to vault back to $150 or $7 per thousand cubic feet (Mcf) of natural gas.

Rather, the dynamic at play is that supply is quickly outstripping demand, a reversal of the trend that lifted prices and fueled industry profits for much of the past decade.

While oil prices can still vary widely, the most probable scenarios indicate a longterm range of $70 to $90 per bbl. by 2020, Click said. Natural gas is also stuck in a well-known rut of its own, with prices eventually stabilizing around $5 per Mcf, Click said.

The companies that prosper will be those that are most efficient in a core specialization.

Some companies have already started to evolve. In November 2009, Devon Energy unveiled a plan to reposition itself as a highgrowth North American onshore company and divest all of its Gulf of Mexico and international assets. The proceeds were directed to its high-return U.S. and Canadian onshore portfolio and to retire debt. Company officials said the value of its Gulf and international assets weren’t helping its stock price.

It also developed technology, human resources and streamlined capital to maximize its advantages, Click said.

ExxonMobil, too, stepped back from retail sales to focus on global exploration and production, driving higher returns through specialization in asset evaluation, capital discipline and facilities management.

Click recommends against across-theboard cuts for companies. Instead, energy companies should think in terms of developing capabilities rather than buying or selling assets.

An investment in capabilities can often be shifted from one sector to another. But energy companies focusing on a type of commodity will be left vulnerable if prices drop, he said.

Companies should also jettison or outsource anything that doesn’t line up with its core abilities. Click points to BP’s recent sale of refineries in Los Angeles and Texas City, Texas, as evidence of the company’s focus on upstream operations.

Companies will also need to reduce operating costs, since commodity prices are unlikely to rise and profits will depend on efficiency, Click said.

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