This was the first of a series of Dr. Stephen M. Rasey's presentation on using Spotfire and Blitzport at Spotfire user conferences in 2004.
Portfolio Analysis Decision Making With Spotfire® and BlitzPort™
Summary of the presentation by Dr. Stephen M. Rasey, Director and CFO, WiserWays, LLC
February 10, 2004 – Spotfire Energy Forum – Houston, TX
Investment Opportunities
Projects where you have an opportunity to invest capital with estimated, but uncertain, profitable returns in the future.
Example: Exploration Projects
Decisions in the Portfolio Management Process
What Projects should we consider for investment?
A Prospect Inventory
Which Projects have data good enough to trust building Portfolios?
Data Quality Control
Building a Candidate Portfolio
What Strategies create Portfolios that deliver the best results measured by Short Term Requirements – Long Term Goals – High Confidence Results
WiserWays Confidence Curve Calculator a tool that will quickly compute the inverse cumulative probability curve (a “Confidence Curve”) of 1 or more wells of a portfolio.
Portfolio Risk and Reward
We Plot the Portfolio as ONE POINT (Risk, Reward) Definitions Efficient Portfolio: A portfolio that provides the greatest expected return for a given level of risk.
Which is Lowest Risk for a given expected return.
Definition of:
Efficient Portfolio:
- A portfolio that provides the greatest expected return for a given level of risk.
- Which is Lowest Risk for a given expected return.
Efficient Frontier:
- The line on a risk-reward graph comprised of all efficient portfolios.
This is the Frontier for all portfolios with Capex limited to under 500 MMUSD.
So the Frontier is dependent on Budget and Goals
WiserWays BlitzPort™ Confidence Curve Calculator
- The largest version can handle
a 5000 Project inventory,
- Up to 150 funded at any one portfolio
- Up to 3 discrete working interest per project
- “Rank and Cut” driven by customizable strategies and goals.
- Each trace calculates has up to 150 Portfolio points.
- Each Portfolio point has FIVE confidence curves at isotiles (every 5%) written to the database.
- Process time: 15 seconds per trace including writing to the Database. -- 10 Portfolios per second. (2.4Ghz Pentium IV)
- Confidence Curves calculated directly without simulation
Available for sale from WiserWays.
Compare BltizPort MultiField to Monte Carl Simulation
WiserWays MultiField Confidence Curve Calculator Superior vs. Monte Carlo Simulation
- Calculation speed is 20 seconds. Monte Carlo simulation could take 200 to 2000 seconds.
- Repeatable. No random numbers used.
- Output of Monte Carlo simulation always have a statistical uncertainty in the result. MultiField has no such error.
- MultiField automatically writes results to a database. Most Monte Carlo applications us manual processes to write to separate spreadsheets.
- Input Distributions are not limited to Log-Normal assumptions.
Compare Trade-Offs Between Conflicting Goals
Here we compare Return on Capital Employed in 2006 vs Portfolio NPV (in 2003) The selected points (red-blue) are constrained by CumCapex between 450 and 515 $MM
Efficient Frontiers can also compare trade-offs between conflicting goals
Companies using this Portfolio System?
Case Study: Select 2003 Exploration Portfolios based upon Reserves, Finding Cost, Development Capex and Production.
Out of Millions of Portfolios in the database,
- Find 2000-60000 Portfolios to analyze
- T2S1: 1. Select a Named Set of Portfolios to send to Spotfire
- T2S1 – Step2: Choose Canned Queries to send to Spotfire
- What Plots are in the Display?
- Step 1: Display all the available Portfolios.
- Step 2: Apply a minimum Mean Reserves Required.
- Step 3: If we require portfolios with a 99% Confidence of >0 NPV, are there good portfolios? YES.
- Step 3: If we require portfolios with a 99% Confidence of >0 NPV, are there good portfolios? YES.
- Step 4: Require that 99% Confidence of NPV >0
- Applying a constraint to a measure at a specific confidence level is hard to impossible in most optimization processes.
- The BlitzPort approach using Spotfire allows us to set and adjust a NON-LINEAR constraint (NPV.C99>0) very quickly and easily
- Step 4: Require that 99% Confidence of NPV >0
- Step 5: Top quartile performance means Exploration Finding Cost must be <= 1.25
- Step 6: Place Limits on Total Negative Cash Flow
- We look at some new plots (overlaid on the other profile plots)
- Mean Oil Production (MMBO by Year)
- Mean Gas Production (BCF by Year)
- Cumulative Mean After Tax Cash Flow ($MM by year)
- Step 7: Choose Best 2007 Production requirements
- Step 8: Choose Best half of NPV vs Capex
- Step 9: Choose Best half of Reserves vs Capex
- Step 10: Choose Best half of ROCE vs NPV
- Step 11: Choose the Best Portfolios at different capex levels
- Step 12: Use the Project Census tool find which Projects are funded in the selected portfolios.
- What the Project Census Drill down tells us….
- The Census is an Excel workbook with VBA subroutines that reads which records are marked in Spotfire.
- It then creates an SQL query to retrieve the funded projects for those portfolios, organizes and formats the report.
Spotfire Sheds Light on a Complicated Problem
- Woolsey’s 1st Law
- “A Manager would rather live with a problem he cannot solve than accept a solution he does not understand.”
- Woolsey’s 2nd Law
- “A Manager does not want, and will not pay for, an OPTIMUM solution. He wants to be better off now, as quickly and as cheaply as possible.
Spotfire Communicates Portfolio Decisions. How and where the Portfolios are built matters not.
WiserWays-Spotfire Portfolio Analysis Process
- Define the population of potential Projects to fund
- Define a set of Strategies for funding candidate portfolios.
- Use an automated process to generate thousands of candidate portfolios according to the different strategies.
- Load the candidate Portfolios into Spotfire
- Apply/change constraints by sliding Spotfire query devices.
- Select many good portfolios that are close to the Efficient Frontiers of many different measures.
- Find the projects most often funded in these good portfolios. If happy with plan, Fund these projects, Execute Plan
- Change and Negotiate Goals.
- Refine Strategies.
Goals for Improving the Portfolio Management process
- To know which portfolios are superior to other in the Performance measures that matter.
- To “trade-off” one goal with another
Goals for Improving the Portfolio Management process
To Understand, Predict, and communicate the range of possible outcomes of any funded Portfolio
How the proposed project meets these goals
- To know which portfolios are superior to other in the Performance measures that matter. To “trade-off” one goal with another
- The MultiField Portfolio Confidence Curve Calculator can quickly generate the range of results for candidate portfolios quickly.
Goals for Improving the Portfolio Management process
- To Reduce the time to assemble, calculate and analyze the candidate portfolios
- To increase the number of candidate portfolios that can be considered within a given amount of time, thereby exploring more options.
BlitzPort and Spotfire
By making VISIBLE the potential funding opportunities, DECISION MAKERS can see available alternatives and the degree of difference (or equivalence) between them.
Thanks to
Spotfire
For the opportunity to speak here and for the work we have done together since 2001.
Adán Oviedo Pérez, Subdirector, Exploración Vicepresident, Pemex
Brett Edwards, President, Custer Resources
And Thank You for your attention
The PowerPoint presentation is be available for download or if you prefer it is available in Acrobat PDF instead.