The promises and perils of oil & gas specialization

For much of the oil and gas industry's history, bigger was always considered better. But that truism has been displaced by a push towards specialization. In this episode of Upstream in Perspective, Raoul LeBlanc and Reed Olmstead discuss the promises and perils of E&P specialization. Here's an excerpt of the conversation:

Jessica Nelson:
In recent years, operators have shifted towards specialization. Can you guys explain a little bit about what this is and how specialization has changed the oil and gas landscape in North America?

Raoul LeBlanc:
It's interesting when I think back to the beginning of the shale revolution and being in an E&P company-in a big, large global independent during the 90s and the 2000s. It was clearly a case where everybody wanted a diversified portfolio. People had left the US. They'd diversified because they felt the US onshore was a place that was limited, so they went other places. Now, they managed to do that, and at the same time, however, there is a larger trend. There's a larger trend towards specialization in the long-term. Back in the day, people owned their own service sector arms. They owned their own midstream. They owned the power process. We've gradually seen a number of those things fall away. But, by the time we got to US independents, which are the bulk of the market cap, really it was a situation of a diversified portfolio-often across the US in a whole number of assets and those were deemed to be a strength.

Reed Olmstead:
Yeah. I'll give you that for sure. And, I think one of the things we've seen emerge is that pendulum has swung in the other direction. I think that was accelerated by the price collapse first of gas and then oil. Where operators were really placing their bets on either gas or oil. There are actually very few US independent operators that are still oil and gas. And, there are lots of reasons for this. As plays have been delineated, we've been able to hive off the lower quality assets and smaller companies have emerged. But, the push has become in the US, or in the North America arena, for focus on one play or one asset-be an expert in one area. There is no longer an interest for companies to be a "jack of all trades". They want to be the best at one asset, one skill set, one operational mode.

We have seen a large shift. There are a still a few hold outs. Typically, larger companies. But for the lion share of US independents there's no more interest or significantly reduced interest in being diversified across the both the value chain and the asset type.

Jessica Nelson:
Why do we see more specialist operators emerging in North America upstream?

Reed Olmstead:
Well, I think a lot of that reason is that there's not a need. Like Raoul said, operators used to own their own midstream. They used to own their own refining and their own service sector. Now, we have across the value chain specialists emerging. You've got the full gamut of companies and operators in each of those buckets, each of those points along the system. An operator is no longer beholden to owning midstream or owning a refining asset like they might have been back in the '90s or early 2000s.

Raoul LeBlanc:
I agree, Reed. In addition to the fact that, well, they can because they can use third parties. There's also been a strong drive really, let's face it, from investors who are saying two things. Number one, specialization works. The analogy I like to use is that of a decathlete. Even the person who set the world record for the decathlete at the London Olympics would have come in dead last in eight out of the 10 categories. The point is specialization works. In some ways, it's at the heart of the Industrial Revolution, right? If you get good at one thing, you can become very excellent at it.

And, from an investor standpoint a lot of investors are saying to E&P companies, "I don't want you to be diversified. I don't want you to be in 15 different assets and have gas and oil. I understand that it diversifies your portfolio, but I would rather build the synthetic investment portfolio from a number of specialists each of whom is best-in-class in a particular skill set rather than try to have you specialize a lot." There is investor pressure. And the fact that, well, it often does deliver results in terms of efficiency and focus and a reduction in "wasted capital".

What are the risks to specialization and what can the industry do to prepare? Listen to the full podcast to hear the interview.

Learn how to purchase a copy of the special report, The Promises and Perils of Specialization.

Posted 27 August 2018

This is an excerpt from Upstream in Perspective and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.