OT30332 - Capital Gains

Valuation of Oil Assets (including shares). Methodology. Fields. Discounted Cash Flow. Inputs.

The input needed falls into three categories: field data (reserves, the production profile, capex and opex), tax rates and the variables such as the gas or oil price, foreign exchange rate and the discount rate. They should be based on what was known or expected at the time.

Reserves

There is a distinction between hydrocarbons in place and recoverable reserves. Recoverable gas reserves will be high, perhaps 80-90% of the gas in place; recoverable oil reserves will be much lower, perhaps 20-40%. Contemporary technical data/documentation present the best opportunity of obtaining accurate figures. If companies claim more - acceptably - on the basis there are outlying reserves to be taken into account, make sure that the full cost of getting those reserves is factored in.

Reserves are divided into proven, probable and possible, and the distinctions must be reflected as appropriate when considering a valuation. At a Langham Conference in June 1996 it was said that in the early 1980s purchasers only paid for proven reserves (and nothing for exploration), although the evidence now is that this is no longer the case, probably reflecting the greater sophistication of oil exploration techniques. Nevertheless, it indicates something that should be considered when examining a valuation.

Contemporary information about reserves may come from operator budgets, plans and technical reports. If you experience difficulty assessing the technical data on reserves and drilling, etc, the DTI may be able to help.

The Production Profile

The production profile is important for the valuation. It is a product of the start-up date, the recoverable reserves and the rate of extraction. Anticipation of production will enhance the NPV. Occasionally the anticipation of development may have a negative effect on the NPV - where, for instance, the negative value of cash flows before production commences are enhanced by being brought forward. However, overall, there is a tendency to anticipate income. Contemporary operator development/budget plans and technical reports may indicate the profile expected.

Some fields, usually oil fields with floating production platforms, experienced considerable "downtime" when for weather or other reasons production is suspended. This could seriously affect production rates.