I’ve had some disastrous picks over the past few years in some E&P’s. How would one properly value one? I always just tried to value the proved reserves and assign a handicap, but that has not been working out for me:(. Also, I would assume it is not wise to trust the PV-10’s companies put out, but perhaps I’m wrong about that. It’s obvious that the market is overly focused on E&P plays, but even when they go sour it seems these companies get unjustfiably slammed below the values of their reserves. So even when I find companies already trading at 80% of their intrinsic value they still seem to move based on drilling outcomes. This seems to only pertain to small to mid size E&P’s. What’s the proper way to value these companies? Should we assume differing prices for the potential dates of the reserve extraction (e.g. $100/ barrel for 2013 extraction, $110/ barrel for 2014 extractions, et cetera)? Are there any good books on O&G valuation?
i like to know how too. never invested in resource companies.
value investors are suppose to stay away from them due to the inherent difficult in achieving a margin of safety on price of the commodity.
Have you considered much about what resources the companies plays are providing? For example heavy oil requires diluents to move through pipelines, which eats away at profit margins. Natural gas, which isn’t worth f* all right now, produces those diluents (depending on the play) and thats worth more than the oil itself right now.
When you say you value the proved reserves, do you mean the proved-and-probable? From what I’ve read it seems that all the industry publications and whatnot refer to the latter, which could probably up the value quite a bit.
also if you’re really serious about learning it, I’m pretty sure wallstreet prep has a course on O&G valuation. I can’t vouch for it, but it might be worth looking into.
I’m only looking at proved reserves and accounting for mid strem costs. I do need to check out the course you mentioned though. Thanks for pointing that out.
I live in the Permian Basin in West Texas. There is a compnay here that specializes in that exact thing, but I can’t tell you too much more about them than their name. http://www.rivieraensley.com/
A book that a lot of people use around here is David Johnston’s Introduction to Oil Company Analysis.
Accounting for E&P companies is tricky. MIght help to take a look at the Petroleum Accounting textbook.
I do know that most of the service companies and E&P companies around here base the majority of their prices and budgets around a $70/bbl price. 110-120 sounds awfully high. You’ll have an extremely high valuation if you base revenues on a $100+ price.