How Uncertainty Can Be Managed in a Portfolio Context

Abstract

Published in Oil & Gas Executive, Volume 2, Number 1, 1999, pages 37-41. A Strategic Manager's Perspective on Portfolio Management At BHP Petroleum, we have upgraded our portfolio and organizational capabilities and aligned our internal organization structure to global strategies. We are focusing on growing our business, achieving internationally competitive performance on key drivers, because evidence suggests that efficient growth leads to superior shareholder returns. An important driver of achieving efficient growth is portfolio management. I see strategic management as the iteration between what we consider are possible futures; where we want the company to be positioned within these futures; what kind of performance is required by the shareholders; and, given all these factors, what kind of portfolio can deliver on these sometimes conflicting objectives. Two Parts of the Model: Uncertainty and Portfolio Management At BHP, portfolio management started with the need to divest assets that did not fit our strategic or commercial criteria; our initial efforts were on the sell side. These efforts have been successful, with approximately A $1.5billion in assets divested during a period of high prices. More recently, with the bulk of necessary divestments completed, we have turned our attention to the future and what kind of portfolio we need to deliver our shareholder objectives and how we want to manage uncertainty (i.e., scenarios). We are approaching portfolio management in two ways; first, as a way of thinking and, second, using portfolio-management tools to assist us in making investment choices. Portfolio management is a way of thinking about the business - moving from where projects are chosen on the basis rates of return to where projects must not only meet hurdle rates, but portfolio fit must also be evident. By portfolio fit, I mean, for example, the balance between short-, medium-, and long-term production and profit growth, consistency with capabilities, overall balance of technical, commercial or country risks, and other such factors. This sounds easy but, in practice, requires a mental shift for decision makers. Any discussion of portfolio management must deal with the issue of uncertainty. The approach taken to portfolio management in certain and uncertain worlds is fundamentally different. The following are key differences.