hi guys, i am trying to value this oil and gas company which has some world glass assets, but specifically: If they announced that they found a certain amount of gas and they can extract so much everyday, would this be a general DCF? but with what gas price? If the total reserves vs. daily extraction rate gives me say 25 years, is DCF still practical? it feels very much like guessing… I was just wondering if I can put a value on discovery today? e.g this company has 100bcf of natural gas, this will approx. be the cost structure and with that information those assets are worth $10m or something like that? what would be the logic behind such valuation? if anyone can shed any light on this or help to me a link, that would be much appreciated…
Well it depends on what type of oil and gas company it is really. But in general, you would take their current production and decline rate, their reserves, and the expected cost to develop the reserves over their lifetime until they are depleted and DCF it. You will also need to come up with a price deck to use. Then you can eventually get to an NAV figure. And it will be a general guess because you have no idea if all of the reserves will be extracted, at what price, and at what price they will receive for the commodity. Is the company focused on exploration or are they a lower growth corporation? I’m sure this didn’t help at all…
You need to run an NAV.
I would agree that you definitely have to run a NAV but thats moreso as a scorecard against other firms in the sector. Running a NAV is a relative value methodology so you can’t just value the company on NAV alone. I think you’ll want to quantify the implied value that the market is paying for a given level of reserves or production also. Willy
Yes you can use comps or precedent transactions as well. Then you can value it based on what other companies with similar assets go for on a /boe/d and /boe of reserves and back into an EV.
You shouldn’t run the nav yourself, you should look at the nav they give you in their annual reserve report.
how do you guys account for the massive capex outlays that these companies usually have? Just assume that in a few years things will settle down? I know a lot of the smaller E&P’s have been outspending CF over the past couple of years.
The easiest way I have seen is to calculate an EV/proven reserves on a basket of market comps.
http://www.oilandgasinvestor.com/pdf/primer.pdf couple ways you could value that: 1) comps - what other companies are paying for assets in that area on both a production and reserve basis 2) if you have the data you could come up with a PV-10, most of these use a flat price deck (i.e. hold gas & oil prices steady for the 25 years). figure out your yearly production for each year, discount that back 10% (the 10 in PV-10), sum those, subtract well cost, multiply by number of wells
thanks guys, that was really really helpful…i figure i’ll do a NAV and a EV/Proven reserves compared with comps and then similar transactions, hopefully they come out close and it’l give me a better feel for the numbers i am getting… while lookin for this i find a lot of useful information on aswath damodaran’s website ( http://pages.stern.nyu.edu/~adamodar/) particularly the section on valuations. he has a option model for potential reserves, can be helpful in knowing how the market is pricing juniors!!