Insight
Oil and gas valuations – the risky outlook
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*Please note that this report only includes an Excel data file if this is indicated in "What's included" below
Report summary
For investors, risks and returns are two sides of the same coin. An asset with a stable, predictable cash flow requires a lower return than a riskier asset. For companies such as Equinor, BP and TotalEnergies holding renewables assets alongside oil and gas, this divergence is already evident with renewables assets being valued at lower discount rates. But there are also big differences in risk profile between different hydrocarbon assets, not all oil and gas projects are the same. What if stakeholders begin to apply differentiated risk expectations within the oil and gas industry? Enter risk-adjusted discount rates where a premium is applied to reflect additional asset risk. When it comes to the valuation of risky assets for transactions, there are obvious benefits. Advantaged assets should command a premium valuation and risk-adjusted discount rates can capture this.
Table of contents
- Executive summary
- Risk and return
- Oil and gas – a myriad of risks
- Discount rates: when to use standard, WACC or risk-adjusted?
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Risk adjusting assets in the Majors portfolios
- Using the standard NPV10 (nominal) rate
- Scenario 1: risking increases across the entire industry
- Scenario 2: oil is deemed riskier than gas
- Scenario 4: execution risks are elevated
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Appendix
- Risk categories
- Commodity price (market) risk
- Reservoir (reserves) risk
- Execution (and cost) risk
- Operational risk
- Carbon risk
- Country risk
Tables and charts
This report includes the following images and tables:
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Oil and gas risksUndiscounted cash flowNet present value (10% discount rate)
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NPV at 10% and 15% discount rateValue loss going from NPV10 to NPV15NPV for country and execution riskValue loss for country and execution riskSummary table: value loss relative to NPV10
What's included
This report contains:
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