It was Aug. 30 and the crowd at Houston’s NRG Stadium roared to the iconic lyrics of “Thunderstruck,” sung by Brian Johnson.
If it was your plan all along to want good business in Texas, it doesn’t hurt to give the state an emphatic shout-out in one of the most celebrated songs of all time.
The AC/DC show concluded a banner month that featured AAPG and SEG’s IMAGE at the George R. Brown Convention Center. And not just because the band’s tour titled “Power Up” summarizes the world’s message on energy: we need more molecules and more electrons (in order to meet growing demand).
If you want to succeed in the oil and gas industry, you need to have business acumen. This goes beyond having nice things to say to your customers, though that can go a long way, as in AC/DC’s lyrics. As timeless as those lyrics are, so is one thing about world-class exploration: the discoveries need to make a ton of money.
Of all the things that matter in exploration, having your oil and gas discovery provide value is among the most important. This brings us to the topic for this month’s installment: business acumen. Acumen is defined as the ability to “make good decisions, typically quickly, in a certain domain of expertise.” This involves several aspects touched on throughout this series, such as examining evidence, busting dogma, avoiding 100-percent-itis, listening carefully, tenacity, seeking challenging basins, giving back, teamwork, mastering fundamentals – but probably the most important is: How profitable will this oilfield be?
Cindy A. Yeilding, coiner of the term “Explorer’s Mindset,” in her AAPG Distinguished Lecture, said it best: “If the opportunity won’t make money, it will never see the light of day.”
In gathering the interviews for the book, the business acumen theme was probably the last one I recognized. As a scientist, I was curious about the conversations on seismic, well log and other map data. But the business acumen theme is prominent – so much so that there is an entire chapter of the book devoted to it. Originally, the chapter was titled “Markets, Oil and Money” but then I renamed to “Business Success.” In this part of the book, business leaders share their insights to creating highly profitable companies. As executives, their primary role is to deliver high returns to investors, so naturally, conversations concentrated more on financial results.
If you were curious, AC/DC isn’t the only rock band applying geographic context as good business acumen. Check out Soundgarden’s “Outshined” (“looking California, feeling Minnesota”) and Red Hot Chili Peppers’ “All Around the World.” There must be more, but these were some that came to me quickly.
Also in Texas
This Sept. 11, the University of Texas at Austin hosted its annual Senator Kay Bailey Hutchison Energy Center Fall Symposium. The program showcased business leaders who have demonstrated top-notch track records of making smart business decisions, allowing their companies to thrive and shareholders to achieve high total returns: Mike Wirth, Wil VanLoh, Gloria Moncrief, Vicki Hollub, Dan Brouillette, Daniel Yergin, Maynard Holt, and many others.
Observing their success stories, many people new to the oil and gas industry want to know what it takes to succeed in this business. There are short-cycle (onshore shale and tight plays) and long-cycle (deepwater) opportunities, both of which can be highly attractive investments. But investments in the oil and gas industry often take time – years and decades – to pay off in a big way. Wells and pipelines take time to drill and to build, respectively. Both require big capital. Different from how other sectors focus so much on quarterly results.
Mike Wirth offered this quote when asked about the U.S. four-year election cycle at the Honoree Dinner: “Our business extends beyond administrations.” That’s why companies like Chevron have been so successful for so long – they understand time as it is applied to the energy business.
Success in the energy industry is measured in decades.
For students in the audience, Wirth continued with some advice on what it takes to reap great rewards over a career in energy: “Be curious over certain, take the unknown road, and invest in relationships.”
What is Acumen?
Knowing when to pull the trigger on a money-making opportunity.
You’d better have done your homework, and that homework probably involves working with an economist, or at least someone who knows about how cash flows in the energy business.
Let’s explore Cindy’s quote: “If the opportunity won’t make money, it will never see the light of day.”
Value is generated when cash flows exceed the cost of capital. Cost of capital can go by a number of names from company to company, including “opportunity cost,” “discount rate” and “hurdle rate.” An examination of whether the venture will make money entails an in-depth look at discounted cash flows over the life of the project, from exploration, to appraisal, development, production and finally decommissioning. For the life of an oilfield, you need to get your cost of capital right. If you get most of your money from banks, your weighted average cost of capital (WACC) will be quite low, but if it is from private equity, it can be quite expensive.
Once you get your cost of capital right, proceed to the next step on key financial metrics.
Know Your Money Metrics
You probably got into geology because you like the outdoors. Some of you got into geology to find oil and gas, and to make a lot of money for your company by making discoveries.
With AI’s ability to perform all practical math, you should feel more comfortable discounting cash flows at your cost of capital, applying present value (PV), net present value (NPV), internal rate of return (IRR), present value index (PVI), unit costs, payback and other financial metrics to your subsurface work. Just plug your info into Grok, and you’ll get an answer that would take a first-year MBA a few minutes or more to solve with an Excel spreadsheet.
From these key calculations, ask yourself the following question posed by Chris Hinkin, author of SPE’s “Petroleum Economics”:
“Will this project make me richer, or poorer?”
Well, to get that correct, there is one more key item to discuss: costs.
Actually, there are many items, but this article needs to try to be fewer than 2,000 words.
Know Your Costs
Cash flows into a company from an oilfield development are theoretically simple: selling oil and gas at a price per unit, like a 42-gallon barrel of oil or one thousand cubic feet of natural gas. Cash flows out of the company, or costs, are numerous, however. Royalties. Lease operating expenses. Maintenance. Chemical treatments. Salaries. Transport. Supplies. Office buildings, etc.
Taxes.
I think you’ll agree with me: taxes are complex and can make or break a project more than anything (as well as socio-political or government risk). So, talk to your trusted tax professional whether you work in Texas or are planning to be a part of the next bid rounds abroad with complex fiscal terms.
So many references to numbers so far in this article, so I’ll ask the obvious question for all of us geoscientists: “Do you need an MBA for this?”
Cheryl Collarini, lead author for the economics chapter in “Deepwater Sedimentary Systems” (Elsevier, 2022) replied: “I think a lot of people are very successful managing oil and gas companies without MBAs. Studying topics like finance, personal management, law and other disciplines gives you a strong foundation – along with experience – to build confidence in the ability to do those things. One of the things the MBA did for me was Mobil Oil recognized I was serious about advancing in the company. They recognized my strength in finance, which was where my major study was, and I began teaching petroleum economics at Mobil and eventually ExxonMobil for nearly 20 years.”
“Getting an MBA isn’t necessary. There are a lot of benefits from it – from the basic academic exercises, the network and the contacts you meet while there,” William “Billy” Quinn replied.
“I think having an MBA is useful, having the education. But it’s not a requirement to be successful in this industry. We have a strong preference for people in our finance group to have an MBA and relevant experience in banking and financial markets, but honestly, to be CEO, you don’t need an MBA. You need an overall understanding of the business, which you basically get from experience. What I’ve gotten in my career has been instrumental to be able to gain the trust of financial backers and to understand how business works as a whole,” said Peter Lellis.
Decision-making and Predicting the Future
The distinguished leaders present at the KBH Energy Center Fall Symposium have track records of making smart decisions that set up their companies for success in the long run. They don’t toil over relatively small day-to-day decisions, but focus their strength and energy on the long-term trajectory that will create the most value. The best leaders can predict the future.
When I met with Peter Lellis, the late CEO of Advance Energy Partners, for his interview in “The Explorer’s Mindset,” he stressed this important point, and I summarize: Most of the day-to-day action regarding development and production is handled by his managers and technical staff. His job is to look out far in advance and put our company where it needs to be to create value for our investors.
Lellis went on to describe the set up: “First and foremost, having top quality managers to run the different business segments is absolutely key to success. Beyond that, I stay in constant communication with my VPs regarding their business areas. It’s important to have a firm understanding of what is going on, on the drilling side, production and operations, geoscience, finance, land, reservoir, planning side. When things are going well, I’m not that involved with the day-to-day events. When things aren’t going so well, or when there are opportunities, I can get very involved. My involvement across the disciplines waxes and wanes. Regular communication is very important, and I put a lot of stress on that. I formally meet with VPs once a week for three hours, go through the entire set of business opportunities and their status, and also have informal conversations with VPs several times a day.”
We all wish we could predict the one thing that really matters in the commodities business: oil price. This is one of the key unknowns, with so many factors. What will the price per barrel be one month, one year, one decade from now?
Rex Tillerson, in an interview with David Rubenstein, also said: “As an industry, we’re never any good at predicting prices.” So, you need to model them over a wide range of outcomes or scenarios and make sure your oilfield development is robust in those different price environments.
Closing Thoughts: Target Money
While listening to Patrick Rutty’s exploration scouting podcast this week, I caught the phrase he quoted from an upstream executive, “We don’t target oil, we target money.”
When life gets complex, focus on what matters. Not the oilfield in splendid isolation, but the cash flow beyond the cost of capital resulting from the sales of that oilfield’s oil.
One more story, for the students out there, on finance.
Back in grad school, I had lunch with geoscientist Carlos Dengo, who was head of ExxonMobil Upstream Research at the time (a position later held by Elijah White, Jr., who has appeared in this column at least a few times). I asked him, “Would you have done anything different in your time in school that would’ve prepared you better for your career at ExxonMobil?” He replied with certainty, “I would’ve taken more finance and economics.”
If you’ve been living in the world of geo-fantasy interpreting only seismic data as the world-class explorer that you are, maybe take some time to eye the financial side of why your oil and gas fields really drive value, and in some cases as described in AAPG Memoir 125, in NPV terms, exceed the GDP of entire countries.
Keep on exploring … for money.
This article is the eleventh of the monthly articles on The Explorer’s Mindset prepared for AAPG Explorer. This column is based on the second edition of the book “The Explorer’s Mindset: Lessons in Leadership in Applied Geoscience and the Energy Industry.” In this column, we describe the traits of the successful explorer, their leadership qualities and what has enabled them to make game changing discoveries.