Drillinginfo’s E&P valuation model leverages its production, well and rig analysis tools to gauge the aggregate value of assets (AVA) and the resulting net asset value per share. Recently, the company released a report summarizing how E&P valuations stack up based on this model and a flat price assumption of $50/bbl WTI and $3/MMBtu Henry Hub, in association with some sensitivity cases.
The internal analysis behind the model gets fairly complicated; suffice it to say that assets are calculated taking into account type curve breakevens, PDP production, drilling/leasing activity and inventory assumptions. Rig schedules are layered in based on economics, budget/expense guidance and basin factors. The model then calculates discounted cash flow using a discount rate for PDP and PUD assets and estimates NAV based on balance sheet liabilities and the value of non-upstream assets.
At $50/bbl WTI and $3/MMBtu Henry Hub gas, Drillinginfo found that 44 oil-focused U.S. upstream E&Ps that they assessed lined up with forecasts for their total enterprise value (TEV). They also aligned with the NYMEX strip at the time of the report’s release in July 2017. The same was true for NAV and the current market caps for the companies.
As might be expected, smaller and more highly leveraged E&Ps revealed more vulnerability if prices were to shift below the price assumptions, for example to $45/bbl WTI. The report noted that “their balance sheets become extremely challenged” in that environment and they will need balance sheet restructuring if prices should fall below $40. Even the bigger players that are less leveraged would see equity value fade or vanish in a prolonged $35 to$40 environment.
In a series of graphics demonstrating relative AVA for various oil-focused U.S. independents, the analysis concludes that “no significant upside exists to the current enterprise values” at the $50 oil, $3 price assumption. An AVA/TEV of 116% was the highest reached for any of the players and that was for Scoop/Stack specialist Cimarex Energy Co. (NYSE: XEC) and, at a lower value, SandRidge Eneryg Inc. (NYSE: SD), followed by Permian drillers like RSP Permian Inc. (NYSE: RSPP) and Concho Resources Inc. (NYSE: CXO).
Breaking down AVA by PDP/PUD ratios, the analysis noted that while most Permian operators have little to no leverage, they are “heavily reliant on undeveloped acreage,” putting them at risk nonetheless. Non-Permian operators are challenged not only by insufficient upside inventory but also by high leverage. Balanced operators are generally composed of about 70% PUD, 20% PDP and 10% midstream/international/miscellaneous. And they carry medium leverage.
Permian operators have the advantage of greater inventory depth, in many cases, than operators in other basins. They do have higher finding costs per boe, however, along with Scoop/Stack drillers, than those plying the Eagle Ford and D-J/Rockies basins.
The major takeaway of the Drillinginfo analysis is that commodity prices, as always, play a leading role in E&Ps’ upside or downside, despite cost efficiencies, technology gains and even Lady Luck.
Callon Petroleum, currently a Permian Basin pure-play, will gain core oil-weighted positions in both the Permian and Eagle Ford Shale through its combination with Carrizo Oil & Gas.
Lonestar Resources and Whiting Petroleum were among the operators that scored the best in a recent Cowen report on E&P management compensation.
Moody’s found that as a group the 40 oil and gas companies it reviewed generated free cash flow for the first time in 2018, indicating an enhanced ability by E&Ps to tolerate lower commodity prices.