Portfolio considerations

At this phase of the investment decision a number of factors must be considered. The overriding goal of the company is to create shareholder value. In order to achieve the optimal growth for an acceptable level of risk the company invests on a portfolio basis. This means that it will invest in a number of different wells and at times share the costs and working interest with partners in order to improve the risk/reward balance and stay within a budget.

Because the returns of these individual wells are likely to be uncorrelated or weakly correlated (e.g. failure in one exploration well is unlikely to affect the chance of success of another) the risk of the overall portfolio is lower than that of an individual well. This is especially important at the exploration stage due to the high risk of failure.

In addition to this idea of investing in projects which help to reduce the overall risk profile of the company, decision makers must consider the strategic fit to the current business and where the company's skills and expertise lie. Only after considering all of these factors can a decision be made on whether or not to invest in a particular project.

Conclusion

The gas market is an exciting one to be involved in. The world's demand for energy is growing rapidly and it is imperative that it is supplied with clean energy reserves by principled companies.

BG Group is a major world player in this market and it constantly needs to make the right sorts of investment decisions which balance the needs of global consumers, its shareholders, the communities in which it operates, governments and other stakeholders.

Sources: http://businesscasestudies.co.uk/bg-group/investing-in-natural-gas-drilling-down-into-the-risks/conclusion.html#ixzz2sLEKWMUS

Discuss the questions:

1. What Business Principles does BG Group seek to apply?

2. What characteristics of gas business are particularly important in relation to investment decision making?

3. Describe what is meant by ‘discounted cash flow’. What advantages does this method have?

4. Illustrate the calculation of the EMV with the help of a decision tree.

5. Do you think Ukrainian enterprises widely use this methodic?

Case 11.4. «Calculating the risks in making investment decisions»

A BG Group case study

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Economic modelling	\|	Introduction

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