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Oil and gas valuations – the risky outlook

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22 June 2021

Oil and gas valuations – the risky outlook

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?
    • 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
    • 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 8 images and tables including:

  • Oil and gas risks
  • Undiscounted cash flow
  • Net present value (10% discount rate)
  • NPV at 10% and 15% discount rate
  • Value loss going from NPV10 to NPV15
  • NPV for country and execution risk
  • Value loss for country and execution risk
  • Summary table: value loss relative to NPV10

What's included

This report contains:

  • Document

    Oil and gas valuations – the risky outlook

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