Unconventional wisdom - KPMG United States
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Unconventional wisdom

Unconventional wisdom

How leading exploration and production companies can drive superior performance in unconventional resources.


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Exploration and production (E&P) companies have struggled to achieve healthy returns on their investments in unconventional assets. Most traditional E&Ps are not built to move quickly, make and revisit capital and resource allocation decisions frequently, and forecast and report accurately enough to handle the optionality inherent in unconventionals.nventional resources.

Unconventional resources are transforming the North American oil and gas industry, and substantially reshaping the global sector.

Over the past decade, oil production from unconventional sources increased from 10 percent to almost 50 percent of total oil production in the United States. Similarly, unconventional gas production increased from 10 percent to over 60 percent of total output in 2017. Light tight oil and shale gas have increasingly become the primary and sometimes sole focus of many independents, as well as of a substantial portion of international oil company (IOC) portfolios. Consider the significant projected share of capital expenditure in shale projects by publicly traded energy companies over the next 15 years.

Unconventional wisdom

And yet, most industry participants are failing to achieve healthy returns on their investments in unconventional assets.

Better performance is critical in light of the current lower-for-longer price environment and more volatile commodity outlook, in addition to rising service costs and the increased transparency of comparative information across players. However, secure, sustainable and profitable growth in unconventionals has remained elusive, leaving investors to question when—if ever—the industry will demonstrate the ability to provide healthy cash flow returns.

Shale-focused exploration and production companies (E&Ps) have struggled over the past five years to generate the cash return levels required to maintain or extend asset bases. Figure 2 highlights the shortfall between quarterly operating cash flow and capital expenditures for the largest 44 publicly traded U.S. onshore-focused E&Ps. It is worth noting that counter to some prevailing beliefs, the industry was struggling to generate positive free cash flow well before commodity prices started crashing at the end of 2014.

Article Authors

Andy Steinhubl, Principal, KPMG Strategy
Tom Hiddemen, Managing Director, KPMG Strategy

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