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Energy & Natural Resources

Energy and natural resources are industries in which uncertainty is both a long-term and a day to day challenge for management. With fragmentation by markets and services, deregulation and price volatility in the international markets, industry players must learn how to embrace this uncertainty in order to maximize shareholder value. The high investment requirements imposed on the energy and natural resources industries have resulted in new alliances, vertical integration, corporate mergers and the deferral of spending programs as different responses to the problem of doing business in a highly unpredictable world.

Much of the early work on Real Options has been in the fields of energy and natural resources. As pioneers, we and our associates have developed many of the ideas that help managers in these industries understand the value of adopting a flexible approach to investment. Traditional DCF techniques fail to capture the value of managerial flexibility in industries where price volatility is a fact of life. Real Options thinking recognizes the value of waiting until commodity prices rise above trigger points that make a staged investment strategy a more intuitive choice for management. A large investment may seem justifiable from a strategic point of view, but an analysis of medium-term cash flows could paint a less optimistic picture that might deter most managers from giving the project the go-ahead.

We at the Real Options Group can help companies gain a better understanding of exactly where the value is within a project and how managerial flexibility can be quantified by valuing the option to defer the project, stage or abandon it early, expand or contract, or to switch from one technology to another.

ROG can help energy and natural resource companies address important issues and questions such as:

        What is the best development strategy for newly discovered fields? What is the full value of undeveloped petroleum or gas reserves?

        Does it make sense to temporarily shut down and restart or accelerate operations? When should we abandon plants or divisions, expand or redirect our activities?

         In what new technologies or markets should we invest?

         How much should we buy or sell this plant, division, company or high-risk international opportunity?

         Should we build a cheaper but rigid facility or a somewhat more costly but flexible facility that allows switching among several inputs?

         How should we balance our portfolio of gas vs coal plants? How should we optimize the option value of our multinational network of operations as relative fuel prices, labor costs, exchange rates or tax regimes change?

         How can we best allocate our capital budget among several operations or projects? How can we achieve a balanced portfolio of cash-generating vs growth opportunities?

         How would our strategic investment affect our competitors, how might they respond, and what impact would their reaction have on our value?