OIL & GAS VALUATION HELP!!!
4 Questions:
1)NAV models are used to value Asset-centric companies, so to arrive at the cashflows, you only subtract asset-centric expenses, is it sufficient to say the 3 core ones are Production Expense and Development Expense, and then subtract taxes? Please let me know of any others that should be mentioned and how they are projected
2)Follow on from last question, what type of cashflows will we arrive at when we subtract asset-centric expenses? FCFF or FCFE (I feel its FCFF but wanted the answer from someone with more knowledge of NAV)
3)Also apparently we use a discount rate of 10% which is common for the O&G industry, But can someone touch on how we calculate this discount rate and what type of disc. rate it is? (I feel its a WACC, but I am just assuming since i believe the cashflows are FCFF)
4)When we discount the NAV cashflows, do we arrive at Ent. Value and then simply work our way backward from the Ent. Value formula to arrive at equity value? Is there anything unique I should know?
Thanks a lot for your help!
Bump
If anyone can answer these questions, I'd really appreciate it. Thanks
Bump
If you can't help, don't throw monkey sh*t. They are legitimate questions and I'd appreciate if someone could help. Thanks!
I'm not an expert in NAV valuation by any means, but.. - NAV is about projecting the decline cure of an oil well based on available data for comparable wells, then aggregating the number of wells and multiplying production by price to get your top line revenue. Then you pretty much follow the steps in a standard DCF except terminal value is zero. - Not sure about specific expenses, but a common multiple used in oil & gas is EBITDAX (X being exploration cost/risk) - One question i was asked in an interview was "what's the biggest difference between an NAV model and a DCF?" The answer is that there's no terminal value in an NAV model because eventually the oil well is exhausted. Otherwise the two models are very similar. They both rely on projecting future cash flows and discounting them to present value using WACC.
Thanks for the response. So when you walk through a NAV model in an interview, would you say you only subtract asset-centric expenses? Because from what I've been told you leave out corporate level expenses, if you could touch on that, it'd be awesome. Thanks!
Yeah, I think you leave out corporate level expenses as well. I wasn't asked about this in my interview though.
Thanks, have you heard about the 10% discount rate being a common rate used for O&G? If so, I wonder why that's the case?
If anyone could help me out, I'd really appreciate it.
Couple thoughts from someone in the oil patch:
Let's start by separating a NAV from being a way to value a company and key in on something you probably realize but didn't verbalize. You use a NAV build-up to value the finite asset, whether that's a single well, or a full field, or an entire basin of operations. The reason this is important is because it allows you to think about what the expenses would be for a single well. You'd spend on development, production, and taxes, and if you can get good $/BOE numbers (the best way to value O&G assets), you can then easily scale the valuation of single well to a valuation of thousands. Expenses used is more company dependent though, so if you have more info then use that but in the absence of info you can use the expenses you've named.
Given that you haven't adjusted for any sort of interest or anything else, I guess technically it'd be FCFF (total NAV for an operator would be their EV) but I don't think of it that way. A NAV will give you an asset centric cash flow per year; there's no incremental CAPEX, no DD&A (since this doesn't touch the balance sheet), etc so it's not free cash flow in the way you're thinking about it.
PV10, industry standard. Don't overthink it, everyone uses one number for simplicity.
Ya, a full company NAV is the PV of the company's after-tax cash flows so you subtract out debt, add back cash, etc to get to equity. You can then divide by price (assuming it's a public company) and compare the same way that you would with a price from a DCF.
That was honestly super helpful. Thanks a lot good sir.
1) Those are the major ones -- obviously depends how granular you want to get. You'd probably want to remove any maintenance capex as well if provided.
2) NAV is an asset valuation, so these are FCFF -- assumes no leverage on the underlying assets (leverage / capital structure would be at the corporate level). Performing NAV valuation on all of a firms assets gets you the value of those assets. Assuming those are the only assets the firm owns, that also = enterprise value. But if the firm has other assets not included in the nav calculation, those must be added back to determine the full enterprise value.
3) 10% is standard. You don't calculate it. PV-10 is common oil & gas metric. You can think about it like WACC.
4) This is correct, but per my response to #2, you must also include any other assets in the build to enterprise value. Eg, firm may own speculative land positions not capture in the NAV; those may have some value.
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