Wood Mackenzie Advises Explorers to Reload with Quality New Acreage

A comparison of Wood Mackenzie’s latest ranking of company exploration performance with the findings of similar analysis published back in 2005 reveals a striking absence of correlation: today’s top explorers, by and large, are not the same as those of a decade earlier. In fact, most of the companies that ranked in the top half by returns in the original study have since slipped to rank in the lower half.

Based on its findings, Wood Mackenzie predicts that companies now primarily focusing on quality acreage re-load will be the leading explorers of the second half of this decade.

Dr. Andrew Latham, Vice President of Wood Mackenzie’s Exploration Service elaborates: “With the exception of Apache, Anadarko and BG, very few companies manage to sustain exploration outperformance for a decade or more.”

Sustaining outperformance is hard – how long can top explorers stay ahead?

Wood Mackenzie’s analysis underscores that strong results generally reflect commanding acreage positions in key emerging plays, with running room that sustains a few good years of drilling. But eventually, these streams of positive discoveries will mature, and the explorer will need to renew its basins of focus. This may impart a fundamental cyclicity to exploration performance, with individual cycles lasting around a decade. Once established, important emerging plays hold sway, with less emphasis on basin opening activity. Only when the results start to wane, does the explorer begin to concentrate on renewal again. There is also an investment component – companies focus on development post a good phase of exploration success, and take their eye off the ball with respect to acreage ‘re-load’.

“Companies that pull off the remarkable trick of basin renewal at the same time as a wave of success in a hot, emerging basin will stay ahead of the pack for a full decade or more,” Latham explains. “The rest can expect multi-year ‘drill-through’ and re-load cycles in their performance.”

Exploration performance variations also include an element of luck: “It’s easy to imagine a myriad of ways for chance events to influence exploration,” Latham says. “Some positive examples might be price increases, competitor discoveries de-risking acreage, or larger than mapped pool sizes. Negative examples could be unexpected fiscal tightening or delays due to third-party accidents. The importance of luck will vary from company to company and is, of course, nearly impossible to quantify.”

Furthermore, Wood Mackenzie’s analysis emphasises that diminished returns during re-loading need not equate to a broader upstream renewal issue. Larger explorers and Majors can turn to M&A, business development or unconventional plays to help balance and sustain growth momentum through this part of a cycle. “This option is most relevant for larger explorers and Majors as these companies can take the time needed to build deep positions in very long-term exploration plays, confident that their near term performance will not suffer disproportionately,” adds Latham.

Recent top explorers preparing their comeback

According to Wood Mackenzie, the best guide for future star explorers is emphasis on acreage re-load now, regardless of recent drilling results.

From a company perspective, some of the best indicators of new acreage quality may be:

• Large new positions in many different basins with a range of different play types and exploration themes

• Company culture that embraces risk, innovation and creativity

• Substantial budget and commitments to invest

Of the larger Independent Oil Companies Wood Mackenzie says that Anadarko, BG, Noble, Repsol and Tullow have continued to renew their portfolios and look well placed to remain ahead of the pack: “Many other Independents have responded to weak exploration results and shareholder pressure with a retreat from high-impact drilling towards a lower-risk strategy. Life for those Independents that remain committed to big exploration could be getting a little easier in terms of attracting experienced personnel and reduced competition for opportunities. Among the Majors that recently have not ranked highly by returns, we pick out BP and Total as two examples that look to have re-loaded substantial and diverse new positions of high quality. A return to form is likely for both,” Latham offers.

Wood Mackenzie concludes that companies now primarily focusing on quality acreage re-load will be the leading explorers of the second half of this decade. This anticipated success is largely independent of whether or not these companies are currently in the midst of a good run in one or more of today’s hottest basins. Outperformance for the period 2008-2012 is only one of many guides for predicting the exploration winners of 2016 and beyond.

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Wood Mackenzie, December 05, 2013