Company or Asset Valuations
In recent years, exploration activity has increased significantly on the Norwegian Continental Shelf (NCS). The number of small E&P companies with exploration focus establishing themselves on the NCS has also increased strongly. Along with the exploration success one has been able to see increasing activity in the transaction market for exploration license interests. Sell side companies are focusing on exploration but not wanting to participate in the development of discoveries. Buy side companies are driven by production, reserve replacement targets, and portfolio balance considerations.
Rystad Energy assists industrial players in establishing a value for new discoveries – both the bottom-up value and the expected market value. Attaining a value of a discovery is essential for clients to establish their future strategies. Rystad Energy generates production profiles for discoveries using a wide set of analogs. Capital and operating expenditure profiles are estimated thereafter based on characteristics of the field and our database of actual costs in the region. These input data series are subsequently added to our proprietary valuation models. Different scenarios are then evaluated depending on possible appraisal results and additional exploration success in the area. The impact of different oil price scenarios is also included in the analysis.
The bottom-up valuation results provide a starting point for clients to establish a solid basis for their asset management of a discovery – value growth over time, capital requirement profiles, and possible market value if divestment is considered. The derived, implied value is benchmarked against previous transactions on the NCS as well as against transactions of similar fields globally. Such discovery valuations leverage Rystad Energy’s solid field-by-field data sets and global transaction database and take full advantage of our thorough analytical approach and broad experience in valuation of exploration assets and portfolios.
The client is a fund manager with a portfolio weighted towards oil and gas exploration companies. The investment strategy is driven by fundamental analysis of cash flow forecasts at field level. The fund should have a balanced exposure to oil vs. gas prices, to emerging markets vs. OECD markets, to exploration upside vs. proved core assets, to cost-geared vs. high-margin developments, and to the key growth markets being North America shale liquids, Canada oil sands, Atlantic deep-water, Asia LNG, and Arctic exploration.
Rystad Energy provides discounted cash flow analysis on a large number of oil and gas fields owned by several hundred quoted companies and at various price scenarios. Data are based on UCube and supported by assumptions, justifications, and data consistency indicators. Customized deep dive analysis and presentations are performed on selected topics and companies. The data set is being updated regularly.
The result of the data is summarized in a data table, where the sum of parts NPV for the company is compared with the “upstream enterprise value”, which excludes all other businesses apart from upstream oil and gas, and is based on the market value of equity and net debt. The summary data, as shown to the right, has been utilized to support the fund’s investment decisions on large cap E&P companies. The second slide shows a deep dive into the valuation of small cap E&P companies active in the Granite Wash unconventional play in the USA.
There are many E&P companies with offshore focus that have asset portfolios predominantly made up of exploration acreage. This is especially the case on the Norwegian Continental Shelf (NCS). When valuating exploration assets the challenge is not just related to volume characteristics but also to timing, for example drilling of wildcat and appraisal wells or lead time of developments in case of exploration success. Analysts have traditionally dealt with this challenge by using standard risk multiples. However, this approach often does not consider value drivers such as timing effects and regional differences within the exploration assets. For instance, there are significant differences in cost structure and development timing for assets in the North Sea compared to the Barents Sea due to market distance, infrastructure, etc.
Rystad Energy has built its own proprietary valuation model for exploration portfolios, which takes commercial and geological risks as well as the drilling probability into account. Based on the extensive data provided in our UCube database, reliable benchmarks are available for exploration success, cost inputs, development solutions, and lead time. Through extensive research from consulting projects and the NCS Business Development Atlas, Rystad Energy has developed an extensive understanding of the rig market, especially on the NCS. This provides a strong foundation for assessing when and where future wildcat wells will be drilled.
The result is a robust, transparent, and flexible model for the valuation of exploration portfolios, which takes into account different risks, cost, time, and regional parameters. Results can be visualized with risked production and cash flow profiles together with key ratios as seen in the graph.