E&P Asset Value and Its Implications on Share Price Gregg A. Jacobson Gregg A. Jacobson Randall & Dewey, Inc. Search for other works by this author on: This Site Google Scholar Paper presented at the SPE Hydrocarbon Economics and Evaluation Symposium, Dallas, Texas, April 2001. Paper Number: SPE-68581-MS https://doi.org/10.2118/68581-MS Published: April 02 2001 Cite View This Citation Add to Citation Manager Share Icon Share Twitter LinkedIn Get Permissions Search Site Citation Jacobson, Gregg A. "E&P Asset Value and Its Implications on Share Price." Paper presented at the SPE Hydrocarbon Economics and Evaluation Symposium, Dallas, Texas, April 2001. doi: https://doi.org/10.2118/68581-MS Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAll ProceedingsSociety of Petroleum Engineers (SPE)SPE Hydrocarbon Economics and Evaluation Symposium Search Advanced Search AbstractEvery day E&P companies are confronted with opportunities and decisions, which will impact the value of the assets and enterprise that they manage. As the goal of publicly held companies is to maximize shareholder value, companies tend to respond by attempting to maximize Wall Street's preferred valuation metric of the day. Return on capital employed (ROCE), cash flow per share, reserve replacement and finding and development costs per BOE are used to judge the industry's performance over time; but the most significant determinant of both absolute and relative shareholder returns remains a company's ability to increase the value of its reserve base in an economic fashion. A multi-year study of 45 publicly held independent E&P companies establishes the strong correlation between reserve value and share price performance.IntroductionDiscounted cash flow techniques are well established as the most effective building block in the creation of an accurate and functional valuation.1 The share price an investor is willing to pay generally reflects the present value of the future cash flows from existing operations as well as the prospective value of a firm's ability to create wealth from initiatives not currently implemented. For an E&P company, the timing and nature of future cash flows from existing operations are a direct function of reserve life, reserve quality and development status. Unfortunately, the quantification of reserve value is not direct and not publicly reported in a timely and useful format. With no tangible measure of value, analysts will focus on the known and quantifiable metrics generated from current period reporting such as earnings per share, cash flow per share and return on capital employed.Modern accounting methods capture the scope of value creation only over the course of a full cycle evaluation. Rarely is the impact of value creation for an E&P company reflected in the reported results in the period the value has been created.2For an extraction based industry such as exploration and production, current period results may have no direct relations to the future value of projected production and therefore, have limited utility in either effective valuation or performance measurement. The influence of emphasis on near term reporting results cannot be overstated. How often is it heard that a certain field was divested in order to increase subsequent ROCE or that an acquisition is immediately accretive to cash flow per share? Unfortunately, near term net income, ROCE, cash flow per share and even production volumes can sometimes be maximized while simultaneously destroying long term value. It can be demonstrated that reserve value creation has the most direct and lasting influence on shareholder return significantly more than any other widely accepted performance measure.Evaluation FrameworkForty-five U.S. based E&P companies were evaluated for the four-year period from 1996 to 1999. The companies selected were the largest publicly traded E&P companies at year-end 1996 that were still traded at year-end 1999. Due to the active mergers and acquisition market for E&P companies, some of the larger and well-known entities in 1996 were subsequently bought or merged into the surviving entities. Non-E&P assets had to represent less than 25% of operating cash flow in 1996 for the entity to be considered for this study. As a result, integrated companies or at least companies that were integrated in 1996, have been excluded from the analysis. The valuation approaches discussed in this analysis are applicable to the upstream component of an integrated enterprise, but the correlation to share price and shareholder returns are not as directly influenced by reserve value for an integrated enterprise as for a more "pure" independent E&P. Keywords: premium valuation, implication, cash flow, reserves replacement, valuation, reserve value, capital, evaluation, randall, share price Subjects: Asset and Portfolio Management, Reserves replacement, booking and auditing This content is only available via PDF. 2001. Society of Petroleum Engineers You can access this article if you purchase or spend a download.
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