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Oil and Gas Valuation
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Overview
Analysis and valuation in the energy sector is complicated by its division into three main segments – “upstream” exploration and production (“E&P”), “midstream” gathering and transmission, and “downstream” refining and marketing. The sector also has unique and highly industry-specific “metrics” for performance measurement and valuation. Finally, substantial changes in organizational forms – especially the division of E&P from midstream and downstream assets, and the further organization of “pure-play” gathering/transmission assets – are a further challenge.
In appraising potential E&P investments, IPO opportunities, or M&A situations, a familiarity with reserve modeling is critical. Cashflows must be modeled so as to reflect the differing natures of developed vs. non-developed, producing vs. non-producing, and proven vs. probable and possible reserves. Non-production “hard assets” and unexplored production acreage also need to be included in any valuation. Cashflow models reflecting these differing assets, and which break down value into “going concern” vs. “liquidation” scenarios”, are invaluable in making analytical judgments.
Moreover, the breadth of the sector requires an understanding of the valuation of “midstream” and “downstream” assets. Investors are increasingly expressing strong preferences for “pure-play” exposures, and such assets can have very attractive sustainable cashflow characteristics, which can be utilized to fund “upstream” activities. Comparable firm and comparable transaction analysis is critical in this area.
Objectives
- Provide practical exposure to reserve DCF modeling techniques, and contrast the different categories of reserves, both in “going concern” and “liquidation scenarios, and how these are modeled
- Review methodologies for valuing non-reserve “hard” assets, as well as midstream and downstream activities
- Define key industry-specific metrics, such as BOE, MMCFE, DACF, EBITDAX, distribution yields, etc.
- Highlight public market valuation of upstream, midstream, downstream, and integrated assets, as well as explore structures such as royalty trusts and gathering/transmission MLPs
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Illustrate these techniques in the M&A context, while exploring credit issues and the financing of energy firms
Who Should Attend?
- Energy investment bankers
- Sell-side securities analysts
- Buy-side portfolio managers
- Sovereign wealth and pension fund analysts
- Corporate planners and strategists
- Credit analysts
- Accountants and lawyers working with energy clients and transactions
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UPSTREAM MODULE: Days 1-3
Topic 1: Analysis and Valuation of Reserves and E&P Companies Using DCF and NAV
Firms and investors need to deploy intrinsic or absolute approaches when analyzing 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 Modeling and Valuation
- Reserve Replacement Approach to DCF Modeling 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 Theoretical Justification
Case Firms
- AMOCO Sale of MW Petroleum to Apache
- Excel Model of MW Petroleum Reserves Valuation
Topic 2: 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 analyzing 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 Firms
- A Typical Mid-size E&P Firm: St. Mary’s Oil and Gas
- An Interesting Option: Islamic Sukkuk Bond Financing of Gulf of Mexico E&P Play
Topic 3: 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, organized as royalty trusts or production master limited partnerships, which then can be monetized 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 Assts 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 Firms
- Prudhoe Bay Royalty Trust
- LINE Energy
MIDSTREAM MODULE: Day 4
Midstream Assets: Analysis and Valuation of Gathering and Transmission Assets and Firms
Many “integrated” oil and gas firms have assets beyond production reserves – such as pipeline “gathering” and transmission networks, known as midstream assets. A worldwide revolution toward the creation of numerous “pure-play” companies in this sector has resulted in enormous capital-raising and M&A activity among pipeline master limited partnerships.
- The Pipeline Master Limited Partnership Revolution
- The Role of Leverage in MLPs
- Cashflow Metrics
- Distribution Yield
- Price/Earnings
- Price/Cash Earnings
- Price/Distributable Cashflow
- EV/EBITDA
- Price/Book Value
- Transmission Assets as “Infrastructure Private Equity” – Inflation Hedges
- Partnerships Structures: GPs vs. LPs, Incentive Agreements
- Capital-sourcing for MLPs
- Credit Issues for MLP assets
Case Firms
- MPLX
- The Kinder Morgan MLP Complex: Kinder-Morgan Partners, Kinder Morgan Inc., and Kinder Morgan Management
DOWNSTREAM / M&A MODULE: Day 5
Downstream Assets: Analysis and Valuation of Refining and Marketing Assets and Firms
Just as many “integrated” oil and gas firms have midstream assets, many also have downstream assets, such as refineries and petrol station networks. Many firms historically have been “pure-play” refining and marketing (R&M) firms. But a second worldwide revolution among “integrated” companies has been there disposal, via spinoffs, of their R&M assets as pure-play companies. Once again, this revolution has resulted in enormous capital-raising and M&A activity.
- Traditional Pure Play Refiners and Marketers
- The Break-up Wave: Marathon, Conoco, Hess, Occidental Petroleum
- Cashflow Metrics
- Price/Earnings
- Price/Cash Earnings
- EV/EBITDA
- Price/Book Value
- Sum-of-the-Parts Analysis
- Refining and Marketing Assets as “Infrastructure Private Equity” – Inflation Hedges
- Environmental Rectification Liabilities: A Big Potential Headache for R&Ms
Case Firms
- China’s Big R&M Firm: Sinopec
- Esso Oil (Thailand) Initial Public Offering
- Exxon Sale of Japanese R&M Assets
- Marathon Petroleum: Now an R&M Pure Play
- Break-up of Conoco into Conoco and Phillips 66
- Sum-of-the Parts Valuation of “Big Integrateds”
Bringing It All Together: M&A in the Energy Sector
The centrality of energy to modern life, the scale of the sector, its capital intensity, and its inherent risks have all made it a fertile area for capital-raising and consolidation activity. The range of asset types – upstream, midstream, downstream – as well as corporate forms – corporations, trusts, master limited partnerships – add to this richness.
- E&P vs. Midstream vs. R&M Assets
- Sum-of-the-Parts Analysis
- DCF Valuation in M&A
- Comparable Firm Analysis in M&A
- Comparable Transaction Analysis in M&A
- Operational Metrics in M&A
- Accretion and Dilution and Credit/Funding Issues
Case Firms
- Union Pacific Resources Takeover of Norcen Energy
- Excel Model – Valuation of Norcen Energy Reserves: “Blowdown Scenario”
- Excel Model – Valuation of Norcen Energy Reserves: “Growth Scenario”
Course Summary and Close
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Our Tailored Learning Offering
Do you have five or more people interested in attending this course? Do you want to tailor it to meet your company’s exact requirements? If you’d like to do either of these, we can bring this course to your company’s office. You could even save up to 50% on the cost of sending delegates to a public course and dramatically increase your ROI.
If you want to run this course at a location convenient to you or if you want a completely customised learning solution, we can help.
We produce learning solutions that are completely unique to your business. We’ll guide you through the whole process, from the initial consultancy to evaluating the success of the full learning experience. Our learning specialists ensure you get the maximum return on your training investment.
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We have a combined experience of over 60 years providing learning solutions to the world’s major organisations and are privileged to have contributed to their success. We view our clients as partners and focus on understanding the needs of each organisation we work with to tailor learning solutions to specific requirements.
We are proud of our record of customer satisfaction. Here is why you should choose us to help you achieve your goals and accelerate your career:
- Quality – our clients consistently rate our performance ‘excellent’ or ‘outstanding’. Our average overall score awarded to us by our clients is nine out of ten.
- Track record – 10/10 of the world’s largest banks have chosen us as there training provider and we have delivered training across the largest banks and have trained over 25,000 professionals.
- Knowledge – our 100+ strong team of industry specialist trainers are world leading financial leaders and commentators, ensuring our knowledge base is second to none.
- Reliability – if we promise it, we deliver it. We have delivered over 25,000 events both in person and online, using simultaneous translation to delegates from over 99 countries.
- Recognition – we are accredited by the British Accreditation Council and the CPD Certification Service. In an independent review by Feefo we scored 4.2/5 on service and 4.7/5 on Coursecheck
Instructor
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Andrew Regan
With experience that spans both practical and academic spheres, I specialise in delivering training in the theory and practice of corporate finance and financial markets. My specialty is valuation in the public and private equity markets, but other interests include portfolio management and real estate valuation.Biography
Andrew D. Regan, CFA Andrew Regan started in investment banking at Merrill Lynch, serving as a financial advisor to municipal entities and directing their efforts in raising public capital in the tax-exempt debt markets. After business school, Mr. Regan became Retailing Analyst at Donaldson, Lufkin, and Jenrette in New York, where he counseled large institutional investors on their retail sector holdings. In addition to these conventional sell-side equity research duties, he was centrally engaged while at DLJ in a number of banking transactions involving merchants, including LBOs, IPOs, primary and secondary equity offerings, and private placements. Mr. Regan returned to Harvard Business School as a Charles M. Williams Fellow and Dean’s Doctoral Award Winner. His research interests included the performance of LBOs, privatization in emerging markets, competition in the securities markets, and capital availability in the airline industry. In 1994-95 Mr. Regan served as Secretary to Professor Samuel Hayes, Warren Buffet, GE Chairman John Welch, former Merrill Lynch Chairman Daniel Tully, and other members of the Compensation Practices Committee, a blue-ribbon panel of securities industry experts appointed by SEC Chairman Arthur Levitt to look at remuneration in the retail brokerage business. Mr. Regan provides consulting support to financial service organizations looking for organizational and staff development in the theory, practice, and products of corporate finance and financial markets. This includes both the “sell-side” process of such activity (advisory, M&A, and capital markets) as well as the concomitant “buy-side” analysis (investors and their analytical approaches). He has delivered projects for clients in North America as well as Europe, Latin America, Asia, Africa, and the Middle East. Those clients include all the U.S. “Bulge Bracket” firms, as well as several Persian Gulf and Chinese financial institutions, and he has worked with private firms on a variety of financial and strategic issues. Mr. Regan has also worked with financial staff at China Petroleum and Chemical (Sinopec), the large Chinese downstream/integrated firm, on analysis and valuation. Mr. Regan received his A.B. magna cum laude with Highest Honors in Modern European History from Harvard College in 1983, his M.Sc., with Distinction, in West European Politics from the London School of Economics in 1986, and his M.B.A., with High Honors, from HBS, where he was a George F. Baker Scholar, in 1988. He holds the CFA Charter.
