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Course details

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Oil & Gas Valuation

Learn the key methodologies to effectively value oil & gas assets
  • This 4 day course provides necessary practical skills to model and value upstream, midstream, and downstream assets, from the perspective of an investor, equity analyst, or as part of a corporate transaction.

    Course Description

    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 pureplay gathering/transmission assets – are a further challenge.

    In appraising potential E&P investments, IPO opportunities, or M&A situations, a familiarity with reserve modelling is critical. Cash flows must be modelled so as to reflect the differing natures of developed vs. non-developed, producing vs. nonproducing, and proven vs. probable and possible reserves. Nonproduction ‘hard assets’ and unexplored production acreage also need to be included in any valuation. Cash flow 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 ‘pureplay’ 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.

    The course will:

    • Provide practical exposure to reserve DCF modelling techniques, and contrast the different categories of reserves, both in 'going concern' and liquidation scenarios, and how these are modelled
    • 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
    • Illustrate these techniques in the M&A context, while exploring credit issues and the financing of energy firms


    Who should attend:

    • Energy investment bankers
    • Sellside securities analysts
    • Buyside portfolio managers
    • Sovereign wealth and pension fund analysts
    • Corporate planners and strategists
    • Credit analysts
    • Accountants and lawyers working with energy clients and transactions
  • Day 1

    Upstream Assets: 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 cash flow 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 blow down 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 theoretical justification

    CASES:

    • AMOCO Sale of MW Petroleum to Apache
    • Excel Model of MW Petroleum Reserves Valuation

    Day 2

    Upstream Assets: 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
      - Fullcost vs. successful efforts accounting
    • Cash flow metrics
      - Price/cash earnings
      - EV/DACF
      - EV/EBITDA
      - EV/EBITDAX
      - Dividend, DACF, and EDITDA yield
    • 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


    CASES:

    • A typical midsize E&P Firm: St. Mary’s Oil and Gas
    • An interesting option: Islamic Sukuk bond financing of Gulf of Mexico E&P play

    Day 3

    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
    • Cash flow metrics
      - Distribution yield
      - Price/ earnings
      - Price/ cash earnings
      - Price/ distributable cash flow
      - 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


    CASES

    • The Kinder Morgan MLP Complex: Kinder-Morgan Partners, Kinder Morgan Inc., and Kinder Morgan Management

    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 breakup wave: marathon, Conoco, Hess, occidental petroleum
    • Cash flow 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

    Cases

    • 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
    • Breakup of Conoco into Conoco and Phillips 66
    • Sum-of-the parts valuation of big integrates


    Day 4

    Back to the Upstream: Upstream MLPs and Royalty Trusts

    In disposing of R&M networks via spinoffs, 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 assets as wasting assets
    • Royalty trusts vs. production master limited partnerships
    • Fire-and-forget production assets as yield plays
    • Cash flow metrics
      - Distribution yield
      - Price/earnings
      - Price/cash earnings
      - Price/distributable cash flow
      - EV/EBITDA
    • Price/book value
    • Residual values

    Cases:

    • Prudhoe Bay Royalty Trust
    • LINE Energy

    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

    Cases:

    • Union Pacific Resources takeover of Norcen Energy
    • Excel model of Norcen Energy Reserves: Blow down scenario
    • Excel model of Norcen Energy Reserves: Growth scenari

     

  • 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.

  • 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 – we have delivered training solutions for 95% of worlds’ top 100 banks and have trained over 250,000 professionals.
    • Knowledge – our 150 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 20,000 events both in person and online, using simultaneous translation to delegates from over 180 countries.
    • Recognition – we are accredited by the British Accreditation Council and the CPD Certification Service. In an independent review by Feefo we scored 96% on service and 95% on product
This course can be run as an In-house or Tailored Learning programme

Instructor

  • 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, CFA, 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, he became a 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.He then 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 he 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.Andrew provides consulting support to financial service organizations looking for organisational 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. He has also worked with financial staff at China Petroleum and Chemical (Sinopec), the large Chinese downstream/integrated firm, on analysis and valuation.Andrew 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.