Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Determining Oil and Gas Company Valuations

Companies / Oil Companies Jan 11, 2010 - 12:35 PM GMT

By: Keith_Schaefer

Companies

Best Financial Markets Analysis ArticleHow do valuations get set for oil and gas companies?  I ask because I’m seeing very fast-rising valuations in the junior and intermediate oil sector that I cover. I have seen junior oil producers valued at $200,000 per flowing barrel recently – more than triple the peer group average.


Industry statistics concur. A December 24th report by Peters & Co., a Calgary-based securities firm that is an oil and gas boutique, showed that the average purchase/sale price for oil weighted production in Q4 2009 was $100,000 per flowing barrel. 

This is up more than 50% from the Q3 valuation of just over $60,000. (Oil and gas equivalent is the way the industry puts the two commodities into one valuation, usually at 6:1 ratio of gas-to-oil).

The report showed that valuations for natural gas weighted purchases also jumped up more than 50% in Q4, from $35,000 per flowing boe to $54,700.  These numbers have an immediate impact on junior and intermediate stocks across the board, as you’ll read.

(There are several ways to value oil and gas companies, but I find the price per flowing barrel to be the simplest.  It’s easily calculated: market cap + debt (or minus cash) divided by the daily production level of the company, in barrels per day.)

What is driving these fast rising valuations? It’s

1)     an increasing oil price and

2)     improving technology – especially multi-stage fracking – that is allowing producers to retrieve more oil and gas, more quickly, in each well. This increases cash flow which increases stock prices. 

3)     Lower risk oil reservoirs—especially with the new “tight” oil and gas plays—drilling success rate is often 95%-100% now.

The market follows these transaction prices closely, and then transfers those individual transaction valuations over to company wide valuations (the stock price).  They have a huge – and immediate – impact on stock prices.

Research analysts would quickly calculate the valuation of all the producers in those areas based on the price of the most recent sale, and decide who is undervalued or overvalued.

The market saw a perfect example of that this week when Berens Energy (BEN-TSX) was bought by Petrobakken (PBN-TSX) for $90,000 per flowing boe, for their Cardium oil production and land package in Alberta.  Over the next two days the market re-rated (upwards) many of the other juniors in the Cardium (see my story on this: http://tinyurl.com/yfkmag6) to be much closer to that valuation.  It meant a 20-30% move for some stocks in a couple days.

So I really wanted to understand – when two companies sit down to sell production and land package, how do they decide on a price?  I spoke with Neil Roszell, CEO of Wild Stream Exploration Inc. (WSX-TSX) to give me a valuation analysis in simple terms:

“Overall, a buyer would pay 90-100% of the base independent engineering value of an asset,” he told me, “subject to internal review that agrees with the numbers, and then evaluate the risked upside of the undeveloped reserves not in the engineering report and pay some portion thereof.”

As an example, he said to assume that base production in a hypothetical North American oilfield is worth $60,000-$80,000/boepd.

So if Company X has 500 boepd of production with reserves, the independent report might say it’s worth $35 million (500 x $70,000/boe). 

Plus, they have a further 10,000 net acres of undeveloped land.  To decide on the upside evaluation of that undeveloped land, the buyer would decide how much of it is prospective, and divide that by 640 to get the number of sections (or 1 square mile – there are 640 acres in 1 section or 1 square mile) times (x) the number of wells per section times (x) the Net Present Value (NPV) of each well. 

Here is the math arranged like a grade school sum:

Base production value

+ (Raw acreage x prospective %

/ 640 x wells per section

x NPV per well

= Valuation per flowing boe

Then, the buyer and seller split that number – the buyer will pay a portion, or an agreed percentage, of that undeveloped land upside, from the seller.

For this example, we’ll say 70% of the land is prospective for horizontal drilling, after the buyer’s technical review.

So 10,000 acres x 70% /640 =  11 net sections x 4 well per section = 44 net possible wells.  The potential value of the drilling is 44 x $3,000,000 NPV/well = $132 million.

That would make the total possible value of the deal worth $167 million ($35 million for base production + $132 million for undeveloped land), or $335,000 per flowing boe ($167M/500 boepd).

Roszell said a likely bid would be to pay the $35 million + some percentage of the $132 million.  If the two parties agreed at 25%, (which equals $33 million) then the deal would look like this:  $35 million + 33 million = $68 million or $136,000 per flowing boe ($68 M/500 boepd).

The buyer is looking to turn the $68 million paid into $150-$170 million of value, thereby giving their investors a longer term double.

To recap, besides the increasing oil price, the market is seeing these significantly higher valuations because the NPV of these wells has been increasing, especially as improvement in technology – specifically multi-stage fracking – has greatly improved economics.  Plus the high IP rates in the new tight oil and gas plays heavily increase NPV. 

And as I’ve mentioned in several stories, the industry is still finding ways to increase recoveries, cash flows and NPVs.  It’s an exciting time to be investing in the energy sector.

Another reason for high valuations is that these unconventional plays are geologically quite consistent, so the seller is wanting – and getting – more of that near-certain future cash flow.  The probability of the buyer producing the maximum theoretical potential of that land is very high.  With consistent geology and 3D seismic, buyers have nowhere near the risk they did in deals done a decade ago. 

That’s why I’m seeing transactions done as high as $175,000 and $200,000 per flowing boe.  And it’s having an immediate, positive, impact on junior and intermediate oil stocks in Canada.

About Oil & Gas Investments Bulletin

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets - and stocks - in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin - they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles growing oil and gas companies.  The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty. Companies do not pay in any way to be profiled. For more information about the Bulletin or to subscribe, please visit: www.oilandgas-investments.com.

Legal Disclaimer: Under no circumstances should any Oil and Gas Investments Bulletin material be construed as an offering of securities or investment advice. Readers should consult with his/her professional investment advisor regarding investments in securities referred to herein. It is our opinion that junior public oil and gas companies should be evaluated as speculative investments. The companies on which we focus are typically smaller, early stage, oil and gas producers. Such companies by nature carry a high level of risk. Keith Schaefer is not a registered investment dealer or advisor. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer to buy or sell the securities mentioned, or the giving of investment advice. Oil and Gas Investments is a commercial enterprise whose revenue is solely derived from subscription fees. It has been designed to serve as a research portal for subscribers, who must rely on themselves or their investment advisors in determining the suitability of any investment decisions they wish to make. Keith Schaefer does not receive fees directly or indirectly in connection with any comments or opinions expressed in his reports. He bases his investment decisions based on his research, and will state in each instance the shares held by him in each company. The copyright in all material on this site is held or used by permission by us. The contents of this site are provided for informational purposes only and may not, in any form or by any means, be copied or reproduced, summarized, distributed, modified, transmitted, revised or commercially exploited without our prior written permission.

© 2010, Oil & Gas Investments Bulletin   

Contact Us:
Email: nichola@oilandgas-investments.com
Customer Service: 1-877-844-8606
www.oilandgas-investments.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


06 Aug 10, 18:48
oil and gas

Great article I have had a hard time finding out the proper valuations for Oil and Gas companies.

One company I like in particular is Africa Oil which is exploring for oil in Somalia.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in