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Monday, February 28, 2011

Stab at Petrobakken Valuation

http://seekingalpha.com/article/255467-a-north-american-energy-play-with-a-4-dividend-yield-and-upside

I actually think I'm being overly conservative, but all I really want is for enough value to support the current Petrobank share price.
Posted by Devon Shire at 1:22 PM
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3 comments:

  1. I enjoyed the article. I think you are right, especially about the quality of the management. Thanks.

    ReplyDelete

  2. I reviewed your valuation of Petrobakken, and have a few questions about it, or valuations for Canadian E+P companies in general. First your point about using the Engineer's NPV @10%, are these estimates reasonably accurate? Are there studies that you're aware of to measure the accuracy of these measures? If it was a valid metric, then a value of an E+P company would simply be the engineer's NPV, + any value for undeveloped properties, (i guess judged at a multiple based on active M&A activity) + a premium for management.

    I'm new to this space and have feeling hesitant to use this number as a baseline valuation.

    ReplyDelete

  3. The PV10 numbers are fluid. Every day brings a different price of oil and natural gas. Those prices combined with assumptions about future production and assumptions on the cost to develop that future production create the PV10 figure.

    So if you looked at an oil companies PV10 at Dec 31, 2008 when oil was $40 it would be radically different from Dec 31, 2010 when it was $90.

    Valuation of anything isn't simple math. The value of something is different to everyone based on their assumptions of the future.

    E&P companies are valued both based on reserves and also based on current production. Others use acquisition comparisons.

    I think it is an issue you have to study and get comfortable with. PV10 gives you a rough idea of the value of future cash flows given a specific set of assumptions. You then have to decide if you believe those assumptions.

    For Petrobakken I think the PV10 figures considerably understate the amount of oil that is eventually going to be recovered as well as likely understates the price of oil that it will be sold at. So for me it is useful as a conservative rough estimate.

    For someone else though who thinks oil prices will fall they might think the PV10 vastly overstates the value of future cash flows.

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