Analysis, Valuation, & M&A in Oil & Gas: M1 - Analysis & Valuation of Reserves & E&P Companies

Analysis, Valuation, and M&A in Oil and Gas (Modular Course) 15-18 December 2014, Hong Kong M1 - Analysis and Valuation of Reserves and E&P Companies 15-16 December 2014, Hong Kong M2 - Midstream Assets: Analysis and Valuation of Gathering and Transmission Assets and Firms 17 December 2014, Hong Kong M3 - Downstream Assets: Analysis and Valuation of Refining and Marketing Assets and Firms 18 December 2014, Hong Kong Each module can be booked separately. Attend all the modules and save US$2,280. Contact energy@euromoneyasia.com for more information.
M1 - Analysis and Valuation of Reserves and E&P Companies 15-16 December 2014, Hong Kong Analysis and valuation of reserves and E&P companies using DCF and NAV Firms and investors need to deploy intrinsic or absolute approaches when analysing and valuing upstream assets – oil and gas reserve bases. Discounted cashflow methodology is the most common tool when valuing such exploration and production (E&P) assets, resulting in an estimated net asset value (NAV) for an upstream resource. But such analysis involves many assumptions about future oil and gas pricing, production levels, extraction costs, capital expenditure, reserve lives, residual values, and discount rates. Energy assets: upstream vs. midstream vs. downstream ‘Gassy” vs. “oily” assets Definitions: proven producing vs. proven not producing vs. probable vs. possible reserves Production level assumptions Extraction cost assumptions Output price assumptions Capital expenditure assumptions Depletion and depreciation Determining the discount rate Estimating a residual or terminal value Liquidation or “blowdown” approach to DCF modelling and valuation Reserve replacement approach to DCF modelling and valuation Possible reserves as “real options” A key question: how much of a reserve base should an E&P company maintain? A “rule-of-thumb” with justification Case studies: AMOCO sale of MW petroleum to apache Excel Model of MW petroleum reserves valuation Analysis and valuation of reserves and E&P companies using comparable firm metrics and operational metrics Firms and investors also need to deploy relative approaches when analysing and valuing upstream assets. DCF methodology is most common for a developer/ owner/ operator of a reserve, but even privately-held operators have to raise capital from non-operator investors. Such investors are very focused on public market benchmarks for production assets, and hence peer group or comparable company analysis is vital. A third alternative, operational metrics such as enterprise value per barrel of oil equivalent (EV/BOE), provide a very commonly-used “rule-of-thumb” approach. E&P firms: - Finding costs, success rates - Measuring returns to capital: ROIC vs. CFROI Nature of the reserves and impacts on valuation: “gassy” firms vs. “oily” firms and the impact of the relative prices of oil and natural gas Identifying the peer group: “dimensions of comparability” Two key issues: - Political risk: geographic location of reserves? - Economic risk: cost and feasibility of extraction? How to measure performance and valuation: valuation metrics - Energy sector highlight: depletion and depreciation - Full-cost vs. successful efforts accounting Cashflow metrics - Price/ cash earnings - EV/DACF - EV/EBITDA - EV/EBITDAX - Dividend, DACF, and EDITDA yields Price/ NAV An alternative: operational metrics - EV/ proven producing reserves - EV/ proven producing and proven non-producing reserves - EV/ proven producing, proven non-producing, and probable reserves EV/ proven producing, proven non-producing, probable, and possible reserves - EV/ Barrel vs. EV/MCFE vs. EV/BOE Conventions for valuing associated fixed assets Sum-of-the-parts analysis Capital-sourcing for E&P firms Credit issues for E&P assets Case studies: A typical mid-size E&P firm: St. Mary’s Oil and Gas An interesting option: Islamic Sukuk Bond Financing of Gulf of Mexico E&P Play Upstream MLPs and Royalty Trusts In disposing of R&M networks via spin-offs, many previously “integrated” firms have become essentially upstream assets. A traditional way to finance upstream activities has been to segregate proven producing properties into separate firms, organised as royalty trusts or production master limited partnerships, which then can be monetised to provide capital for additional exploration. Once again, the creation of such royalty trusts and production MLPs has resulted in enormous capital-raising and M&A activity. No replacement: upstream assets as “wasting” assets Royalty trusts vs. production master limited partnerships “Fire-and-forget” production assets as yield plays Cashflow metrics - Distribution yield - Price/ earnings - Price/ cash earnings - Price/ distributable cashflow - EV/EBITDA Price/ book value Residual values Case studies Prudhoe Bay Royalty Trust LINE energy Course summary and close