As the price of oil continues to slide downward, many energy companies are evaluating their market positioning, seeking opportunities to mitigate risks and taking action.
One of the interesting results of this process is the insight it has provided into the impact the price of oil has on companies, especially those that are not oil companies. It has also revealed how the visibility and capabilities enabled by project portfolio management (PPM) can become a competitive advantage for these companies as they attempt to navigate through the downturn.
For example, an electric utility recently formed a Master Limited Partnership (MLP) to hold its natural gas midstream assets. The utility recognizes earnings from the MLP via equity income. The MLP decided to expand its midstream asset base to include crude oil infrastructure, indirectly increasing the utility’s exposure to commodity-related market risk. As the price of oil has declined, unfamiliar volatility has been introduced into the utility’s stock price.
With market projections indicating prolonged reductions in the price of oil, the utility has focused on stabilizing current capital investments prior to making new capital investments. Stabilization efforts include achieving a normalized run rate for capital expenditures over the next several years. To accomplish this, the utility’s senior leadership team has leveraged project portfolio management processes designed to support annual planning efforts by gaining visibility into the current portfolio of capital projects and conducting several ‘what-if’ scenarios for analysis, including the application of capital constraints and the resulting impact on the portfolio’s alignment with the company’s corporate strategy.
The ability to visualize the impact of decision-making on a company’s long-term capital plan and strategy is a competitive advantage provided by PPM that can pay dividends, especially when a downturn drives the need for senior leaders to make critical decisions quickly as the market landscape is rapidly changing.