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In this Accenture report, we discuss the demand, limitations, structures and approaches to optimal energy asset investments, with a focus on the midstream energy sector.
The report first highlights key energy investment historical trends and forecasts for refineries, LNG terminals and power generation assets globally. Acknowledging the strong demand for energy assets investments, we analysed how liquidity requirements and balance-sheet deleveraging are limiting traditional energy companies in committing capital for new investments.
This led us to identify the need for new joint investment structures that aim to allocate and contain market, credit and operational risks to specialized energy businesses, enabling more cautious investors seeking stable returns to provide larger amounts of capital while achieving stable returns with a reduced risk-exposure.
However, to develop and execute such investment structures, we have listed five key focus areas—forecasting, valuation, risk modeling, commercial structuring and trading and marketing capabilities—that industry players need to master.
Our work with global energy companies confirms our conclusions, that firms that focus on developing best-in-class asset underwriting capabilities through the use of advanced forecasting, valuation, risk and structuring models increase their ability to optimize intrinsic and extrinsic returns from investments.
Download the report [PDF, 929KB]
Based on our work with leading global energy commodities trading organisations, international energy companies and energy-focused infrastructure funds, we have identified capital and commercial structures for joint-investments in energy assets where risk-exposure, return and capital-intensity are structured and shared among equity investors to meet specific investment profiles.
Examples include a combination of off-take and preferred supply structured contracts; tolling and leasing; joint-ventures with preferred commercial rights; outsourced operations through build, own, operate, transfer (BOOT) and service contracting; and, additional contractual options and embedded derivatives.
Accenture identified five key value levers and capabilities needed to achieve high returns in joint energy investments. They are:
An accurate and comprehensive view of commodity supply, demand and pricing through advanced optimization and forecasting capabilities.
A valuation model that captures all options and commercial arrangements to derive the specific return for all invested parties.
An optimal joint venture structure through the use of leading financial engineering and capital optimization capabilities.
An accurate assessment and quantification of embedded market, credit and operational risks through sophisticated risk modeling.
A robust design of the joint venture framework, and alignment of roles, responsibilities and accountabilities per the contractual setup.
High levels of future investments and balance-sheet restructuring will result in a high volume of energy asset transactions. Energy players and other investors in the sector that want to target these assets now need to focus on improving their asset underwriting capabilities.
Portfolio management decisions that are based on state-of-the-art financial valuation and structuring techniques will provide a key competitive advantage to energy players, ensuring assets are structured to optimize intrinsic and extrinsic returns.
Ogan Kose is Accenture’s senior director of Commodity Trading & Risk Management
Xavier Veillard is Accenture’s manager of Corporate Strategy and Mergers & Acquisitions
May 25, 2012
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