How to Value An Oil & Gas Company

Hi,

Can anyone tell me what the key factors are when looking to value an oil or gas company? What are the industry specific factors influencing the an oil or gas stock? What metrics would I use to value a specific oil and gas stock?

Any help would be most appreciated!

Thanks in advance.

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Comments (13)

Feb 5, 2011 - 1:34am

guessing he's going to say e&p or asset (e.g. shale gas play)

short answer is a NAV model. essentially a dcf where your revs are driven by the price of (gas) and the production. On top of the fact that opinions on future gas prices can vary greatly depending on the source (wood mac, cera, etc), there are a ton of other factors (where are you selling geographically...henry hub +- a basis differential, well costs, number wells, spacing, acreage, million tax issues, royalties), but nav is the easy answer.

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Feb 5, 2011 - 3:25am

Upstream and downstream are quite different businesses... but either way assets are the key factor in energy. Basically an NAV model will value the assets today, assuming no future acq or development. Again assets, whether they be proven reserves or pipelines are what produce revenue, not market position or brand name like in other businesses, remember energy is a commodity

Feb 5, 2011 - 4:25am

I don't know much, but I can give you a high level on why O&G companies are diff. First of all, they are very asset centric, so the value is derived off the assets they have on the b/s rather than primarily looking at revenue or other similar metrics. You wouldn't use a DCF because E&P companies are very CAPEX intensive so they would have very low FCF leading to a low valuation. You also have to account for the fact that oil is a depleting asset so you cannot assume a well will last forever and there will always be an asset retirement obligation, etc. Also, companies cannot control O&G prices the same way a normal retailer can control the price of the items they sell. The price of O&G is determined by the market and you have to account for fluctuations in price.

Note: I do not work in an oil and gas group, but interviewed with one and did some homework so any of the more experienced O&G bankers feel free to chime in and correct me if I'm wrong on anything. I also have a few primers that some members on this site have sent to me and I would be happy to forward them your way if you want, just send me a PM.

Feb 5, 2011 - 6:29am
SHORTmyCDO:
I don't know much, but I can give you a high level on why O&G companies are diff. First of all, they are very asset centric, so the value is derived off the assets they have on the b/s rather than primarily looking at revenue or other similar metrics. You wouldn't use a DCF because E&P companies are very CAPEX intensive so they would have very low FCF leading to a low valuation. You also have to account for the fact that oil is a depleting asset so you cannot assume a well will last forever and there will always be an asset retirement obligation, etc. Also, companies cannot control O&G prices the same way a normal retailer can control the price of the items they sell. The price of O&G is determined by the market and you have to account for fluctuations in price.

Note: I do not work in an oil and gas group, but interviewed with one and did some homework so any of the more experienced O&G bankers feel free to chime in and correct me if I'm wrong on anything. I also have a few primers that some members on this site have sent to me and I would be happy to forward them your way if you want, just send me a PM.

Very good answer. Sent you a PM, would love to get a look at those primers.

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Feb 5, 2011 - 4:19pm

Hi,

Thanks for the great answers everyone.

What are the specific accounting differences when analyzing an oil and gas company when compared with a normal company?

To give you some background I'm asking all of this because I'm interviewing for an equity research role which is entry level. I don't have an educational background in finance and my work experience has been in hedge fund sales, however it was an oil and gas hedge fund so I want to have all my bases covered.

Thanks everyone.

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