E&P Modeling Question Oil & Gas

I tried to read through some of the previous posts in regards to finding the FCF for an E&P company but I am still getting confused. What I got out of it was that I would forecast the FCF normally as [ =EBITDA(1-T)+DAT- change in networking capital - Capex ] but then I was confused in terms of adding back the exploration cost to find EBITDAX.

I looked all over Google and the only DCF help I could find was a sample spreadsheet that should Net Income getting inflated by the exploration costs then discounting at the WACC.

Can anyone explain the FCF I would discount with WACC?

WSO Elite Modeling Package

  • 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
  • Elite instructors from top BB investment banks and private equity megafunds
  • Includes Company DB + Video Library Access (1 year)

Comments (3)

Sep 23, 2010 - 10:38pm

E&P companies are weird to value, so I'll list a couple of bullet points that helped me.

1) There are two types of accounting for E&P companies. Successful efforts, this uses exploration expense (QEP uses successful efforts), and full cost. The rule for full cost is that the PV10 from the reserves has to be larger than the carrying value of those assets. If not there is an impairment (CHK, BEXP both use the full cost method). An exploration expense only comes up if the company drills a well and there is no resource there.

2) E&P companies are valued based off of the amount of reserves that they have. Reserves are broken down into the following.
1) Proved
a) Proved developed producing (PDP) - just what it sounds like; resource that is actually producing
b) Proved undeveloped (PUD) - resource that is to come to market within five years (if I remember correctly)

2) Probable - 50% chance of the resource being there and coming to market.
3) Possible - 10% chance of the resource being there and coming to market.

Proved = 1P
Proved + probable = 2P
Proved + probable + possible = 3P

3) The best thing to do is look through the company's corporate presentation. They will usually give you a reserve breakdown as well as some important cost metrics, like operating expense per BOE, finding and development (F&D) cost, and their cost per daily production. F&D cost can be thought of as how much it is going to take to get the resource out of the ground, or more simply put, how much capex to get the resource.

Now to your question, the FCFF calculation:

EBIT*(1-t) + DD&A + exploration expense (or impairment if they use full cost) - change in NWC - capex

Exploration expense is a non-cash line item like DD&A so you add it back. Hope this helps. Also, 6 Mcf = 1 Boe

Sep 24, 2010 - 10:59am

That was very helpful, thank you.

A couple of questions I still have:

1) In terms of the reserves I would just look at the PDs & PDPs and use those numbers * expected oil or natty price to determine the sales?

2) Are there any different standards for taxes when dealing with E&Ps? I know many have NOL, and didn't know if there should be a different classification of a effective tax rate.

Thanks for all the help. I really appreciate it.

Start Discussion

Total Avg Compensation

April 2021 Investment Banking

  • Director/MD (9) $911
  • Vice President (34) $348
  • Associates (185) $233
  • 2nd Year Analyst (106) $150
  • Intern/Summer Associate (96) $145
  • 3rd+ Year Analyst (26) $145
  • 1st Year Analyst (391) $132
  • Intern/Summer Analyst (318) $82