O&G industry specific valuation multiples for upstream
Hello,
could anyone give me a thorough explanation why it is a common practice to use "EV/Daily Production" multiples? I understand there are specific multiples related to upstream companies like EV/EBITDAX, EV/Reserves (1P, 2P, 3P), which make perfect sense to me together with the reasoning behind their usage. However, I somehow can't seem to understand why is it important (useful) to look at daily production (assign value to boe produced per day to get to an Enterprise Value of a company).
Thanks.
This industry is interesting because each company sells a nearly identical product, at least within specific basins and not accounting for minor differences in gravity/GORs. When looking at enterprise values, the boepd metric tells you how much investors like/dislike a company. For example, Concho/Diamondback/Parsley trade at ridiculous boepd's, well over $100,000 whereas smaller operators like Halcon (distress aside)/Laredo/SM trade between $50,000-$70,000 boepd. Specific knowledge of these companies positions and operating efficiencies tell me that premiums are being paid on existing production for the former group because they operate large, blocked-up positions, have economies of scale when it comes to frac crews/completions and generally produce higher performing wells. For the latter group, be it inexperience, corporate distress, completion uncertainty or less desirable acreage, investors pay less per flowing barrel.
Ok, I understand, but what you just described is applicable to almost any multiple (investors pay more for healthy companies or companies with some form of competitive advantage; pay less for distressed companies). What I meant is the connection between EV and the daily production. I assume that it is because the daily (or monthly/annual) production somehow reflects the production from Proved and developed company's reserves, which are viewed as a source of operating income as of today and in the near future and therefore currently affects EV of a company. Am I correct?
I also read in other valuation sources, that current or forward looking metrics for production and reserves should be used, because of the dynamic changes (acquisitions, divestments of reserves) in companies' reserves, which often distort EV. Is that correct?
I believe so, yes. PDP by definition requires little capex to convert to cash flow which from my point of view is what is most valuable to investors. What is missing from that equation is the PDNP and PUDs which should factor into EV as its the source of future cash flow. I would say its good to evaluate E&Ps on a variety of multiples to get a sense for value.
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