Capital efficiency starts with corporate strategy and requires agility and foresight to pursue, abandon, or defer capital projects. This is critical to companies who are chasing margin over revenue in today’s market.
From a capital project perspective, capital efficiency requires defining a clear corporate capital investment strategy; optimizing an organization’s portfolio and projects to align with that strategy; developing internal process, procedures, and capabilities to execute projects that align contract strategies; establishing how “value” is measured; and enabling technology with an organization’s capabilities and risk appetite.
This enhances your ability to not only deliver projects on time and on budget, but ensures you optimize your return on capital employed. Capital efficiency also requires the courage to abandon, suspend, or divest under-performing projects that no longer align with your portfolio or corporate strategy.
Capital efficiency: Measure of a company’s ability to select, deploy, and manage capital investments that maximize shareholder value.
Capital efficiency is required throughout the entire asset lifecycle from strategy through execution. Benchmarking your organization against a standard framework (see figure below) helps to determine blind spots where you can capture value and achieve the most benefit from your capital allocation strategy, selection, and project execution.
Capital agility: Understanding the unique dependencies between these twelve elements allows organizations to better integrate strategy with planning and execution—through measurement, feedback, and lessons learned—to better inform capital allocation.
To be more productive, capital projects and operations must be pushed to the superior free cash flow curve shown below. To influence cost reduction through continuous improvement and lessons learned depends on early intervention in the well-field lifecycle. Efficiencies that drive cost and schedule reduction will optimize free cash flow and drive field, pad, or wellhead profitability.
“Capital efficiency is tailored by each oil and gas organization in terms of compatibility with enterprise value, strategy and asset mix.”
Capital efficiency is driven by continuous improvement initiatives as well as the use of external benchmarks.
In capital-intensive industries like oil and gas, ongoing measurement of value from capital investment is standard practice. This return fluctuates with commodity price, resulting in inconsistent and unpredictable revenue forecasts. Successful E&Ps will differentiate themselves from their competitors by optimizing the return from each capital dollar invested.
Determining the best metric to evaluate performance against your peers provides opportunities to learn from those in the top quartile, as well as see how others are interpreting current trends and market recovery scenarios and in turn managing their portfolio of assets. While each organization may measure capital efficiency in a different manner, baselines have been developed in order to compare organizations’ capital spending effectiveness.
Other measures provide qualitative insight into an organization’s ability to manage its portfolio to better achieve capital efficiency. The PwC capital efficiency scorecard is one such baseline that allows an organization to see where their strengths/weaknesses lie. See "Capital efficiency scorecard" below for details.
Capital velocity: Ratio of annual capex to the capital employed in the business and a proxy for measuring the growth agenda of organizations in capital intensive industries.
A fluctuating price environment has created a shift from capital velocity to capital selectivity among E&Ps’ capital projects.
The chart below plots ROCE against capital velocity to determine top quartile performers. Read our full report for more information and details (available in our download strip below).
Return on capital employed (ROCE): Rate of return the business is generating compared to the capital employed to generate those returns.
By working with organizations pursuing capital efficiency, PwC has developed a “capital efficiency scorecard” which is an organizational assessment of all “elements of capital efficiency” tailored to energy specific drivers. Below is a sample illustrating the elements measured.