How do valuations get set for oil and gas companies? I ask because I’m seeing very fast rising valuations in the junior and intermediate oil sector that I cover. I have seen junior oil producers valued at $200,000 per flowing barrel recently, more than triple the peer group average.
Industry statistics concur. A December 24th report by Peters & Co., a Calgary based securities firm that is an oil and gas boutique, showed that the average purchase/sale price for oil weighted production in Q4 2009 was $100,000 per flowing barrel. This is up more than 50% from the Q3 valuation of just over $60,000. (Oil and gas equivalent is the way the industry puts the two commodities into one valuation, usually at 6:1 ratio of gas-to-oil).
The report showed that valuations for natural gas weighted purchases also jumped up more than 50% in Q4, from $35,000 per flowing boe to $54,700. These numbers have an immediate impact on junior and intermediate stocks across the board, as you’ll read.
(There are several ways to value oil and gas companies, but I find the price per flowing barrel to be the simplest. It’s easily calculated: market cap + debt (or minus cash) divided by the daily production level of the company, in barrels per day.)
What is driving these fast rising valuations? It’s
1) an increasing oil price and
2) improving technology – especially multi-stage fracking – that is allowing producers to retrieve more oil and gas, more quickly, in each well. This increases cash flow which increases stock prices.
3) Lower risk oil reservoirs—especially with the new “tight” oil and gas plays—drilling success rate is often 95%-100% now.
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