Determining Oil & Gas Valuations

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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Oil Stock Valuations Increasing....and Not Just From Higher Oil Prices

I have noticed valuations in the junior oil sector creeping up, sometimes to the point where I have to blink. But it’s not just the increase in the price of oil this year that has driven up valuations. Technology is increasing how much oil or gas companies can produce from a well in a day, and in the overall amount of oil or gas they can recover from a given formation, essentially how fast and how much they produce. Technology is giving investors more leverage to the price of oil.

This is especially true of the hot new “tight” plays that are being developed in western Canada and the US, where I have been focusing the subscriber portfolio.
(“Tight” just means the oil is held in rocks like shale or sandstone, as opposed to the more conventional type of looser sands that hold hydrocarbons, and from which almost all the world’s production has come from in the last 100 years.

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As an example of valuations increasing, in August 2009 TriStar Oil and Gas merged with Petrobank’s Canadian operations, and was valued at about $109,000 per flowing barrel, which was almost double its average peer group valuation at the time. They were a 20,000+ bopd producer, and the larger the company, generally, the larger the valuation.

But now I am seeing junior producers one tenth that size, 2000 bopd or even 1000 bopd producers, get valuations in the $90,000 – $110,000 per flowing boe (barrels of oil equivalent) range. Most of these are in the 3 year old Bakken play in Saskatchewan, or the several months old Cardium play in Alberta. Several Canadian brokerage firms have issued reports saying these two oil plays have the best economics of any in Canada.....Read the entire article.

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