SPE paper 82031
Many companies devote considerable attention and effort to portfolio optimization. Yet most of the literature and experience tells us that shareholders will not pay a premium for diversification and that investors mostly prefer pure plays. Diversification, integration and hedging help companies level earnings and cash flows through economic cycles. The improved stability assists with various stakeholder relationships and lowers debt, salary and transaction costs. However, risk mitigation comes at a price. What is the net impact to the shareholder? Models of typical oil and gas companies and a typical investor household provide an estimation of the effects of portfolio management on shareholder value.
In optimizing a company's asset and investment portfolios, what specifically should we be maximizing to best serve shareholder interests? This paper explores the effects of three several portfolio strategies as seen from the stockholders' perspective: owning related and unrelated business units (e.g., production and refining) and hedging product prices (e.g., selling production forward). The simulation results provide reference points for selecting capital investment decision rules and determining a present value discount rate.
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