Things are (maybe) looking up in the oil patch.We’ve got the IEA and Harold Hamm both predicting $60 oil by the end of the year; the “plunge” allegedly brought on by the deferral at Doha actually turned out to be more whimper than bang; and the storage at Cushing may get some breathing room soon.
So maybe, just maybe, we have hit the bottom, and if so, well it’s time to buy, right?
During the downturn, we have encountered quite a few bankruptcies, some M&A, a whole lot of debt restructuring, some cost-trimming in both services and G&A, and other financial and operational measures by E&P companies. Those that are still alive have a few promising assets up their sleeves.
Since many E&P companies are publicly traded, one of the best sources of information is via the companies’ investor presentations. In most cases you can find the most recent presentation (as a pdf or powerpoint) on the companies’ web site under “investor relations” or something similar. For example on Matador Resources web page, there is an “investors” tab on the top nav, and the final option on the drop down is “presentations and webcasts”
Since many of the terms within these presentations are necessarily arcane financio-wizard speak, I thought I would do a series of posts to help shed some light on a few of the important concepts.
According to Investopedia,
PV10 is the present value of estimated future oil and gas revenues, net of estimated direct expenses, discounted at an annual discount rate of 10%. This nomenclature is most commonly used in the energy industry, and is used to estimate the present value of a company’s proved oil and gas reserves.
Proved Reserves is a measurement of how much hydrocarbons can be recovered from the companies’ acreage with a reasonable amount of certainty. Typically this calculation is done on a per-well location basis and then added together.
So PV10 is a way to value the hydrocarbons that you control that are still in the field, based on the amount of reserves in place less the costs and expenses to develop those reserves (other company overhead is not figured into the PV10).
A strong PV10 is an indication that the company has assets that are (reasonably) accessible over the near term, which will generate future cash flow, and which will keep both the investors and the company in good stead.
The discount is in place to account for the fact that a dollar tomorrow will be worth less than a dollar today.
Let’s take a look at a few examples of PV10 out in the wild.
On slide 5 of Matador’s current investor presentation (pretty early in the deck, so they think feel this is an important concept to communicate about the state of their business) we see this fabulous visualization of their company PV10 for the past three years. It’s very neat because (among other things)
- The pie charts are sized relative to the specified value of their PV10 for those years
- The pie wedges show the relative values of their major play areas – 2013 and 2014 were heavily weighted towards EF reserves, while in the 2015 market the Delaware basin is providing more of the future return.
- The assumptions for both amount of reserves in place, and estimated dollar value of those reserves are called out.
- We see that their gas to liquids mix is getting much stronger towards oil (35% oil in 2014 up to 54% oil in 2015)
- Although we see the value of the PV10 is much reduced (because the price of oil and gas is down), we see that the reserves are going up up up
This slide from Carrizo’s current deck is in the middle of a few slides that focus on their Eagle Ford operations and assets.
- The height of the green bars represent the percentage of Carrizo’s EF operations that are within the x-axis specified project location – so North LaSalle and Irvin represent over a third of their potential drilling locations
- The red dot shows where their PV10 for those drilling locations breaks even vs. WTI price of oil
- The combination of these two projections together paints a fairly compelling picture of their position in the play
- As WTI improves those PV10 locations on the left look even more promising.
Camber Energy, which is an M&A of a couple of operators – the Eagle Ford’s Lucas Energy and Oklahoma’s Segundo Resources – have actually named their new company after a quality of the decline curves of their liquids-rich Hunton acreage. Camber refers to the slightly arched shape of the decline curve you can see in the illustration above.
Much like the previous Carrizo Slide, Camber is trying to make a point about the breakeven points, but relative to recovering drilling cost rather than straight over to WTI. With their Hunton Acreage that payback comes 10 months further into operation, but leaves 60% of the PV10 as future cashflow vs. 31% in the EF operation. So that’s pretty cool.
PV10 is an SEC initiative to standardize reporting on the value of proved reserves. As you can see companies use it in a variety of ways to highlight their strengths, so it doesn’t quite work as a straight line method to value a company. It does provide some very interesting insights, and is definitely a statistic to look at as you analyze company operations.
What do you think? Leave a comment below.
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