Oil & Gas Valuation Help (NAV vs DCF)

Based on the highest ranked content on WSO, here's what you need to know about Oil & Gas valuation using NAV vs. DCF:

1. Differences Between NAV and DCF Models

• NAV Model:

  • No Terminal Value (TV): Unlike DCF, NAV does not assume perpetual growth. Instead, it considers that the reserves will eventually be exhausted.
  • Free Cash Flow Equivalent: In NAV, the equivalent of Free Cash Flow (FCF) is the net cash flow generated from the reserves until they are depleted. This includes revenue from oil/gas production minus operating expenses, capital expenditures, and taxes.
  • Set Out: The NAV model is set out by projecting the net cash flows from the reserves over their productive life and discounting them back to present value.

• DCF Model:

  • Terminal Value (TV): DCF includes a terminal value to account for perpetual growth beyond the forecast period.
  • Free Cash Flow (FCF): DCF uses FCF, which is calculated as EBIT (1-t) + D&A - Capex - Change in NWC.

2. Financing Costs in NAV Valuation

• Project EV to Equity Value: In a NAV valuation, you typically get to the project Enterprise Value (EV) by discounting the net cash flows. To arrive at the equity value, you would:
  • Deduct debt from the project EV.
  • Add cash to the project EV.
  • This approach is correct and aligns with standard valuation practices.

3. Differences in O&G NAV Calculation

• Asset Value Less Debts: The basic principle of NAV being calculated as asset value less any debts holds true for O&G as well.
• O&G Specifics: The key difference in O&G NAV is the focus on the value of the reserves. The NAV model for O&G involves:
  • Estimating the value of the reserves.
  • Projecting the net cash flows from these reserves.
  • Discounting these cash flows to present value.
  • Subtracting any debts and adding cash to get the equity value.

Resources/Templates

• WSO Financial Modeling Resources: You can find various financial modeling templates and guides on WSO, including those specific to DCF and NAV models.
• Oil & Gas Overview: For a more detailed understanding, refer to the Oil and Gas Overview on WSO, which provides insights into valuation metrics like NAV, EV/EBITDA, and more.

For more specific questions or detailed templates, feel free to post on the WSO forums where experts can provide tailored advice and resources.

Sources: Walk me through a DCF, DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!, Top Financial Modeling Courses - List of Top Financial Analyst Courses, 21 Finance Interview Questions and Answers, Oil and Gas Overview