Oil & Gas Valuation Help (NAV vs DCF)

Understand from other forums and general research that NAV is the most common way to value O&G businesses but struggling to understand how to model a NAV and the difference between DCF. Some questions I have:

1. How does a NAV model differ from a DCF? I understand there is no TV as asset/well /reserves will be exhausted at a certain point but what is the FCF equivalent in a NAV and how should it be set out? 

2. How are financing costs taken into account in a NAV valuation? Presumably you get to a project EV and deduct debt (+ cash) to equity value? Or is this wrong? 

3.  I am familiar with NAV being calculated as asset value less any debts so how does an O&G NAV differ? 

Please also shout any resources/templates!

2 Comments
 

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

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

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