Oil & Gas Valuation Considerations
July 16, 2015
Global Financial Advisory Services
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Outline
Oil Revolution
Valuation Considerations
Current Trends
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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]
Oil Revolution
What is Driving the Oil Revolution
Conventional vs. Unconventional
Growth in Reserves
Reserves
Discoveries
Millions of Barrels
Millions of Barrels
40,000 6,000
35,000
5,000
30,000
Reserves
4,000
25,000
20,000 3,000
15,000
Discoveries 2,000
10,000
1,000
5,000
0 Source: Tudor, Pickering & Holt & DrillingInfo.com 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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What is Driving the Oil Revolution
Conventional vs. Unconventional
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What is Driving the Oil Revolution
Technology Conventional vs Unconventional Drilling Targets
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What is Driving the Oil Revolution
Technology - Tools
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What is Driving the Oil Revolution
Operational Efficiency Walking Rig
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What is Driving the Oil Revolution
Upstream Private Equity Capital Focused on U.S. E&P
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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]
Valuation Considerations
Oil and Gas Industry Overview
Supply Chain
Midstream (transportation, processing, and storage)
Natural
Gas Natural Gas
Storage
Gas Mixed
Ethane
Natural Gas Processing / NGLs
Propane
Treating
Butane
Iso-Butane
Nat. Gasoline
NGL
Storage
Crude Oil NGL
Fractionation
Downstream
Upstream (Retail &
(E&P) Storage &
Refined
Products
Distribution)
Terminals
Storage
Refining
(Downstream)
+ Oilfield Services & Equipment
Contract Drilling Compression
Pressure Pumping OCTG
Completion services Rig Equipment
Seismic/geophysical Offshore Equipment
Fluids & drill bits
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Upstream
Upstream Entities by Size, by Type
Integrated
Independents
Upstream MLPs
Number of Privately Held E&P Operators
Private
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Value Drivers
Upstream Commodity price directly impacts valuations
Value is highly correlated to commodity price
$160.00 $90.00
$80.00
$140.00
$70.00
$120.00
$60.00
$100.00
Dollars Per Barrel
$50.00
$80.00
$40.00
$60.00
$30.00
$40.00
$20.00
$20.00
$10.00
$- $-
1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015
Crude Oil (WTI) XOP (E&P ETF)
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Value Drivers
Price of Oil Break Even
Source: Bloomberg
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Value Drivers
Upstream M&A Transaction Value
Monthly Global Deal Value
120.00 160.00
140.00
100.00
120.00
Total Transaction Value, US$B
80.00
100.00
Deal Count
60.00 80.00
60.00
40.00
40.00
20.00
20.00
0.00 0.00
Corporate Asset Deal Count
2015 IHS
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Upstream Valuation
Oil & Gas Ownership Types
Fee minerals (surface and mineral ownership may be severed)
Typically never expire
Economic return primarily in form of (i) upfront lease bonus and (ii) royalty payments
Grants the exclusive right to explore and develop minerals (oil and gas) on the property
Royalty interests (stem from fee mineral ownership)
Non-cost bearing (other than severance, in some cases other costs)
Typically 12.5% to 25.0% of all oil and gas produced (8/8ths)
Working interests (bears all cost of drilling and operations)
a/k/a leasehold interest the lease/interest expires when production ceases
Primary asset base of oil and gas (E&P) companies
Can be an operated working interest or non-operated working interest
Overriding royalty interests
Carved out of the working interest and thus expire when lease expires
Often given by working interest owner, the E&P, to award staff (geologists, landman) and others
Non-cost bearing
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Upstream Asset Valuation Methodologies
Valuation Approach
Producing Fee Market Approach Income Approach Other (Rule of Thumb)
Minerals
Drill-out Scenario
Non-
Transaction Multiples
Created by Reserve Lease Bonus Multiple
($/Net Acre)
Engineer (DCF)
Asset Type
Interests
Royalty
Transaction Multiples Discounted Cash Flow
Multiple of Cash Flow
($/Net Acre) (Reserve Report)
Interests
Working
Transaction Multiples
Discounted Cash Flow
($/boepd or $/proved Multiple of Cash Flow
(Reserve Report)
bbl.)
Preferred
Difficult
Rare
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Upstream Asset Valuation
Discounted Cash Flow
Most commonly cited value from reserve reports is PV-10 (present value using discount
rate of 10%).
PV-10 values do not capture the risk attributes of different reserve categories or different
plays.
As a risk-averse investor, which of the two following opportunities would you prefer?
PV-10
Reserve Category Drilling Costs Low Oil Prices Base Case High Oil Prices
Well A PDP $ 0 $ 500,000 $ 1,000,000 $ 1,500,000
Well B PUD 3,000,000 (1,000,000) 1,000,000 3,000,000
Typically, market participants either apply direct haircuts to PV-10 values or use different
discount rates for different reserve categories (e.g., PV-8 for PDP and PV-25 for PUD)
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Upstream Asset Valuation
Key Metrics
Oil and gas mix
Production and reserve figures are often cited in terms of barrels of oil equivalent or
boe which combines oil and gas statistics into a single measure, generally based on
the energy content. As oil has been more valuable in recent years, oil-focused
production is more valuable.
Reserve life
The R/P ratio (Reserves/Production) measures the time it would take to fully produce
proved reserves at current production levels.
Percent Developed
The amount of proved reserves that have been developed (PDP or PDNP).
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Upstream Valuation
Guideline Public Company Method
In Thousands of U.S. Dollars Range of Indicated Multiples Indicated
Harmonic Selected ABC Enterprise
Measure of Performance Minimum Mean [a] Median Maximum Multiples Results Value
1 EV / 2015 EBITDAX 4.7x 5.7x 5.7x 7.4x 5.3x 22,135 116,762
2 EV / 2016 EBITDAX 3.7x 5.0x 5.5x 6.5x 4.2x 54,206 230,098
3 EV / LFY Proved Reserves (Mboe) 8.2x 12.6x 11.8x 23.9x 9.9x 19,094 188,225
4 EV / LFY Avg Daily Production (Mboe/d) 47,265.7x 72,279.9x 73,175.5x 126,417.1x 57,024.2x 6 333,021
5 EV / 2015 Avg Daily Production (Mboe/d) 34,231.6x 61,274.9x 64,462.6x 106,592.7x 55,940.1x 7 366,004
6 Concluded Enterprise Value $ 246,822
Additional metric to consider, EBITDAX:
EBITDAX: EBITDA before exploration/drilling costs. GAAP allows for two different accounting
treatments for exploration expenses.
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Midstream
Midstream Representative Companies
Diversified
Natural Gas Pipeline
Crude/Refined Products
Gathering and Processing
Other MLPs General Partners, Propane, Upstream, Refiners, OFS
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-50%
0%
100%
150%
200%
-100%
50%
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Value Drivers
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Crude Oil (WTI)
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
^AMZI (MLP)
WTI vs. Alerian MLP Infrastructure Index
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
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Midstream
Midstream Overview
Moving, storing, treating, and Market Capitalization and Number of MLPs
$700 160
separating
Market Capitalization (in Billions)
$600 140
120
Number of MLPs
Pipelines $500
100
$400
Gathering and processing 80
$300
60
MLP-centric businesses $200
40
$100
Distribution history and growth 20
$- 0
prospects 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Market Cap Count
Source: Bloomberg
Unconventional production presents strong opportunities some challenges
Production increases benefit the industry broadly
Location of the production sources have changed, creating growth opportunities and challenging
certain legacy assets
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Value Drivers
Midstream Master Limited Partnerships Yields
Average MLP Distribution Yield by Industry
14.00%
12.44%
12.00%
10.00% 8.73%
7.81% 8.20%
7.66% 7.54% 7.41%
8.00%
5.57% 5.59%
6.00%
4.00%
2.00%
0.00%
Source: Source: National Association of Publicly Traded Partnerships and S&P Capital IQ; data as of 6/30/15
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Oil Field Services
Oil Field Services Representative Companies
Diversified
Equipment & Suppliers
Well Services and Fluid
Management
Contract Drilling
Contract Compression, Seismic Service, Oilfield
Specialty Providers
Distribution, Offshore Transport
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Oil Field Services
Oil Field Services EBITDA Multiples
Oilfield Equipment Manufacturers and
16.0x Oilfield Services & Equipment - Diversified 16.0x Suppliers
14.0x
14.0x 14.0x
12.0x 12.3x 11.9x
12.0x
12.0x
10.6x 9.5x
10.0x 8.8x
10.0x 8.3x 7.9x 8.5x
8.9x 8.0x 7.7x
7.6x 7.7x
8.0x 6.9x 7.3x 7.2x
8.0x 7.4x 7.3x
6.6x 6.8x
6.0x
6.0x
4.0x
4.0x
2.0x
2.0x 0.0x
0.0x
CY 10 CY 11 CY 12 CY 13 LTM LTM LTM LTM LTM
Aug-14 Nov-14 Feb-15 May-15 Jun-15
Oilfield Services Contract Drilling
16.0x
16.0x
14.0x 14.0x
11.9x
12.0x 11.1x 12.0x
9.5x 9.4x
10.0x 8.6x 8.3x 10.0x
8.3x 8.5x 8.0x 8.0x
8.0x 7.5x 7.2x
6.9x 7.3x
8.0x
6.0x 5.8x
6.0x
4.0x 4.4x 4.2x 4.0x
3.5x 3.7x 3.6x 3.9x
4.0x
2.0x
0.0x 2.0x
0.0x
CY 10 CY 11 CY 12 CY 13 LTM LTM LTM LTM LTM
Aug-14 Nov-14 Feb-15 May-15 Jun-15
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Oil Field Services
M&A Transactions Oilfield Services and Equipment
M&A Transactions - Oilfield Service and Equipment
80.0 180
70.0 160
140
60.0
Number of deals
120
50.0
In Billions
100
40.0
80
30.0
60
20.0
40
10.0 20
0.0 0
2008 2009 2010 2011 2012 2013 2014 2015
Asset Corporate Deal Count YTD
Source: IHS Herolds, Inc.; SRR research
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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]
Current Trends
Current Trends
Shell Merger with BG Group
Transaction value of approximately $70 billion (cash and stock)
Rationale
Financial considerations at BG
Access to the liquefied natural gas (LNG) market
Synergy realizations, particularly for international projects
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Current Trends
Halliburton Merger with Baker Hughes
Implications for the industry
Response to concerns over North American activity levels
$2 billion in annual synergies announced
Increase offerings for lower risk, large international projects
Potential hurdles
Antitrust challenges to the merger many, many jurisdictions and
overlapping service offerings
Extraordinary 10% break-up fee
Synergy realizations, particularly for international projects
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Consolidation: Who is next?
Hunters?
Hunters or Prey?
Prey?
Source: IHS
Questions?
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Contact Information
For further information regarding this document please contact the following:
Shishir R. Khetan, CFA
Managing Director
+1.713.221.5119
[email protected]Stout Risius Ross Inc.
815 Walker, Suite 1140
Houston, TX 77002
SRR is a trade name for Stout Risius Ross, Inc. and Stout Risius Ross Advisors, LLC, a FINRA registered broker-dealer and SIPC member firm.
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