E&P Valuation
I currently work in credit research covering high-yield oil & gas companies. Unfortunately, we don't do as much DCF valuation of Exploration and Production companies (E&P) as I would like. I am practicing this for my own skills development and was wondering if anyone has experience forecasting production at the well level. I have heard about the ARPs model and am familiar with its components but am not sure how to put it all together or what the actual equation is. If anyone has experience with modeling this in Excel and is willing to share, it would be much appreciated. There is a lot of paper already in this space and it is growing at a significant pace. I think this would be of use to others as well.
@"rufiolove", saw your comments on another post and seems like you're really good at this, any tips you'd be willing to share would be great!
oil & gas valuation (Originally Posted: 05/03/2013)
What is the best resource for learning oil & gas valuation?
I know there is a Breaking Into Wall Street guide, but other than that most guides and all my finance classes work through the dcf, ev, and accounting stuff for normal companies.
For example, I was asked in a information gathering interview what multiple is used for an oil & gas company. I said "P/E?" and he said, good try - make sure you know the right answer for full time recruitment.
I've since found out the answer to the multiple question, but is there a good resource for oil & gas valuation in general?
Check out mergers and inquisitions. They have a good bit of info on industry specific questions/valuations and o&g.
BIWS is okay; didn't go into as much detail as I would've liked. There's some good industry primers out there from JP, credit Suisse, and Duetche. Do a google search and it should come up.
P/E is meaningless in oil and gas (E&P segment). P/CFPS, EV/EBITDAX, P/NAV (price targets derived from net asset value analysis) are some of the metrics used to compare E&Ps.
There's also some production based metrics such as EV/boe/d, EV/P1 reserves, etc...
Going back to NAV - it's basically a DCF model based on booked reserves at most recent year-end.
great, thanks. I got the 'industry primers'
What multiple did you conclude was appropriate?
O&G valuation is all about three things: Cash Flow, Reserves, and Production. Any multiple based on these is adequate.
Could you please explain why cash flow is more important than earnings?
I know its a very capital-intensive industry but if you use cash-flow multiples like EV/EBITDA (assuming EBITDA is an okay proxy for cash flow) or P/OCF, it seems to disproportionately favor companies that have the largest capital spending programs since the benefit from new capital assets is recognized by the multiple (ie. new assets generate revenue and increase EBITDA) but the cost of the new assets (depreciation) is ignored. So it seems to me that you're recognizing the benefit but not the cost of capital spending.
What are common production-based multiples?
Sorry for the bombardment of questions. I appreciate any feedback. Thanks in advance
A couple of production ratios: EV/Production per day and Production/Share
Regarding the first question, CAPEX is reflected in free cash flow, so the cost of new assets is accounted for if you use FCF as the metric.
What if the company you are looking at is FCF negative over the last year and is expected to be negative in the next year because of high growth spending?
Common cash flow multiples: Price / Discretionary Cash Flow ("DCF" - nomenclature can be confusing) and EV / EBIDTAX
Discretionary Cash Flow is basically cash flow from operations before changes in working capital. It can also be described as free cash flow + capex. The idea is that DCF is an indicator of a company's ability to internally fund capex and service debt.
Reserves multiples: EV / Reserves, EV / Production
Reserves can be quoted as either Bcfe (billion cubic feet equivalent) or MMboe (million barrels of oil equivalent). If the company has a larger % of their reserves in natural gas, you would want to use Bcfe & vice versa.
Production is similarly Mcfe/d (thousand cubic feed equivalent per day) or Boe/d (barrels of oil equivalent per day)
Some of the best resources for learning about E&P companies is to look at independent E&P investor relations presentations and 10Ks. Read through that stuff and google the terms you don't know. Look up EOG Resources, Oasis Petroleum, and Range Resources to get you started.
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