Analysts know that it’s possible for two analysts to hold very different views of the value of an oil and gas asset. A valuation often relies as much on the experience of the analyst and the unique assumptions of the institutions and upstream operators they work for as it does on the technical aspects of the valuation. The complex interplay of macroeconomic, technical and geopolitical assumptions can have a profound effect on perceptions of risk and value, particularly for the longer time horizons in which oil and gas investments operate.
How market conditions affect valuations – and analysts
Two factors add to the complexity of assessing the value of oil and gas assets. First, global commodity markets are highly volatile. Second, with high levels of uncertainty surrounding future energy demand, the oil and gas market strongly favours nimble, short-cycle investments at low breakeven costs. Under these conditions, the speed at which an analyst can produce an accurate, up-to-date assessment of an upstream asset is critical – as is the accuracy of the data used to inform valuations.
Three steps to assessing the value of an oil and gas asset
While valuations can vary widely, the process of arriving at one is often fundamentally the same. Whether for an acquisition or to fill a gap in a portfolio, we often come across a version of the following three-step process.
1. Gather data
In the very simplest terms, those making an investment decision want to know how much hydrocarbon is present in a project, how much can be recovered at what cost, and how much it’s going to sell for. For an analyst, that means gathering data on factors such as location, ownership structure, fiscal environment, economic conditions, tariff arrangements and surrounding infrastructure.
The analyst will also look for an existing production model that can be adjusted to reflect the analyst's views. Analysts may also look for other sources of data and independent analysis to validate their own assumptions.
2. Assess value
The analyst uses the base-case view identified in stage one as the starting point for bespoke upstream asset valuations. At this stage, the analyst adjusts price assumptions, performs sensitivity analysis and asks “what if…?” across any number of variables – What if operating costs could be reduced by 3%? What if capital costs increase by 5%? And so on. This is when valuations can diverge significantly due to differing views on factors such as above-ground and subsurface risk – analysts adjust asset valuations to reflect their own realities.
The analyst converts the cash flow projections from stage two into standard economic indicators. This allows investors to make like-for-like comparisons of assets and their forecast performance. Standard indicators include net present value, (which is projected cash flow translated into today’s dollar value), the breakeven price and the rate of return.
3. Screen assets
This is where the analyst draws on their experience to make a qualitative and quantitative assessment of the oil and gas assets, their value and associated risks and opportunities. At this stage, they'll screen the assets to identify those which meet the client's criteria, creating a shortlist of recommended assets that are most likely to meet corporate objectives. The valuations will then be prepared for presentation in a pitch book, presentation or report.
Why cleaning data can be the most time-consuming and least enjoyable aspect of the analyst’s job
Although an analyst is ultimately measured on the quality of the insights they provide, gathering, cleaning and integrating the data can take up as much as 50% of their time. The data gathered at each stage of the process comes from multiple sources, and, with the proliferation of data in the oil and gas industry, there’s a lot of it. And it’s not unusual for the data sets to disagree with each other. On top of that, oil and gas valuation models are growing in complexity and sophistication.
Even an analyst with advanced Excel skills will struggle to jump in and uncover the insights they’re searching for – the learning curve is steep and the process is time-consuming. (The next most time-consuming task is the asset-by-asset analysis of deals and transactions.)
How to make the most of the analyst’s skills and experience
We're working closely with analysts to understand their workflows and the stages in the process where time can be saved and steps automated. Our goal is to reduce the time analysts spend data wrangling so that they can do what they do best – make judgements of the value of oil and gas assets – at the speed expected by today’s investors and financial institutions.
In a matter of minutes, analysts can access clean and accurate data including asset, company, public markets and transactions in a single platform, Wood Mackenzie Lens®. Intuitive search and screening enable analysts to quickly discover all aspects of our upstream dataset. It includes global fiscal models and data so analysts can run valuations straight away.
Other time-saving features include the ability to switch between views – an analyst can view an asset and then find out more about the participants and surrounding fields, all in a single platform. Standardised charts and maps built on the latest principles of user-led design and data visualisation can be copied into presentations and pitchbooks for a professional look and feel.
Private equity in upstream – what’s next?
Private equity is known for taking under-capitalised assets and exploiting upside. In Upstream, there is no better example than in the North Sea, which outside of North America, has been the hotspot for M&A since the oil price down turn.
Complete the form above to listen to our webinar, where we delve into the strategies of private equity-backed start-ups to answer the following questions:
• Which companies have created value so far (on paper)?
• Can they crystallise this value via a successful exit in the coming years?
• What challenges do these companies face between now and then?
Wood Mackenzie’s analysis allows you to understand how the emergence and potential exit of private equity will impact your business.