Integrated energy companies have continued to consolidate, but finding value for the shareholders remains a challenge for companies in North America and around the world. To find that value, said an investment banker in Houston this week, some of the super majors may consider spinning off their exploration and production (E&P) units to concentrate on pure exploration and pure production — basically unbundling the value that many of the smaller independents have found.

Malcolm Butler, advisory director for HSBC Investment Bank plc in London, speaking at the 22nd Annual Andersen Energy Symposium in Houston, said the super majors are facing challenges in reserve replacement, and many are no longer geared to exploration success. Rather, they acquire other companies to add to their reserves. “The bigger you get, the less geared to you are exploration,” he said. However, higher earnings are beginning to come from upstream operations, and “there’s a strong argument that exploration should be separated from production;…exploration creates value and production capitalizes it.”

Butler noted that upstream earnings for the majors have “consistently been strong,” but added that E&Ps are traditionally not valued for their earnings, just their reserve and production growth. To create the value, Butler said spinning off upstream operations as an independent would provide better investment returns. “Exploration is a growth business,” he said.

It will be difficult, though, for the super majors to convince banks that the move will create value. It’s easier for the smaller companies because they tend to have more exploration success already. “It’s difficult to convince the market you are a growing concern, but there are models emerging. The shareholders want cash flow and that’s something we have to do.”

Butler also predicted that future energy companies will turn toward more diversification of their fuel sources, especially in the renewables market. It won’t, however, come easily. “You don’t get returns right away with renewables… It takes several years.

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