Price Scenario Analysis - Best Practices in a Volatile Price World

Abstract

Abstract E&P capital investment programs and allocation decisions can vary dramatically depending on the underlying price premise used in forecasting future cash flows. The price ‘plateau’ that developed up until the summer of 2014 reduced the criticality of robust pricing assessments in investment decisions as many projects easily met economic thresholds in that environment. Price sensitivity analysis, if conducted at all, was often based on forecast ranges intrinsically linked to the environment of the day. The significant drop in prices during the latter part of 2014 caught many investors and operators off guard, despite a history of cycles and industry memory of past price challenges. Given today's low price reality, many operators find it necessary to closely (and frequently) review their price forecasts and adjust their capital allocation programs to maintain sustainable levels of cash flow. Unfortunately, this is often a reaction to the existing price environment rather than a proactive and strategic positioning for alternative price ‘potential’. Price analysis based on revised economics and ranking, although common in the industry, often fails to yield the insights made possible through more robust portfolio-based price ‘scenario’ analysis methods. Leveraging the interaction of investment options and balancing the unique performance characteristics and timing of assets across various price assumptions can add significant value to a company's portfolio while mitigating downside exposure. This paper provides an overview of best practices in applied price scenario analysis, including methods for integrating this analysis into the ongoing business planning process, specific considerations for tools and processes required, and a case study demonstrating the application of these techniques.