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Valuating Oil & Gas Companies: The Oil Industry – Part 2

Joris Kersten, MSc

M&A Advisory + Business Valuations

发布日期: 2020年5月12日

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Valuating Oil & Gas Companies: The Oil Industry – Part 2

May 12th 2020, Uden/ The Netherlands

www.joriskersten.nl

Consultant & Trainer: Joris Kersten

Joris (1980) is an independent Corporate Finance consultant and trainer with his firm “Kersten Corporate Finance” and www.joriskersten.nl with his office in Uden/ The Netherlands.

Concerning consulting, he provides advise in Mergers & Acquisitions (deal making), valuation and financial modelling for medium sized companies in The Netherlands.

And concerning training, he provides training in valuation and financial modelling at leading (“bulge bracket”) investment banks in New York, London, Hong Kong and the Middle East.

Moreover, he provides training/ lecturing in valuation at Universities, and inhouse at corporations, all over the globe (e.g. Mongolia, Surinam, Kuwait, Peru, Luxembourg, Saudi Arabia, Dubai etc.).

And in The Netherlands he teaches in Finance & Accounting as adjunct faculty at the Universities: TIAS Business School, Nyenrode University and the Maastricht School of Management.

(Open) training programs

The open training programs of Joris Kersten in The Netherlands take place at the dates below.

And for registration just write an email ([email protected]) or look at www.joriskersten.nl.

· 17, 18, 19, 20 and 22, 23 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

· 24, 25, 26, 27 and 29, 30 June 2020: 6 days - Business Valuation & Deal Structuring. Location: Uden/ The Netherlands;

· 19, 20, 21, 22 and 23 July 2020: 5 days – Training with Certificate in Investment Banking. Location: Dubai/ United Arab Emirates;

· 16, 17, 18, 19 and 20 August 2020: 5 days – Training Master Financial Modelling Specialist. Location: Riyadh/ Saudi Arabia;

· 28, 29, 30, 31 October 2020 + 2, 3 November 2020: 6 days - Business Valuation & Deal Structuring. Location: Amsterdam Zuidas/ The Netherlands;

· 16, 17, 18, 19 November 2020: 4 days - Financial Modelling in Excel. Location: Amsterdam Zuidas/ The Netherlands.

Blogs/ articles on valuation

In addition, Joris writes blogs here on linkedin on the following topics (sequences):

1. Net Debt: Cash & debt free + Cash like & debt like items;

2. Financial modelling with "keyboard excel shortcuts";

3. Various topics: Operating lease adjustments, acquisition finance, locked box/ completion accounts closing, purchase price allocation;

4. Bonds & bond markets;

5. Funding & Valuation of startups;

6. Cost of capital: Betas, equity market risk premium, country risk, illiquidity discount, control premium, minority discount, small firm premium;

7. Football field valuation: LBOs, DCF, comps, precedent transactions, accretion/ dilution (M&A model);

8. Valuation of Banks;

9. Valuation of oil & gas companies;

10. Debt & leverage worldwide;

11. Weighted average cost of capital (WACC) – Step by step;

12. Energy transitions to renewable energy;

13. Mergers & Acquisitions (M&As) and M&A transactions;

And new “sequences” of blog topics that I will start soon are:

14. Financial Due Diligence;

15. Derivatives;

16. Distressed M&A and distressed Valuation;

17. Debt crises;

18. How inflation works;

19. Tax and tax evasion;

20. Financial modelling in excel: step by step model building;

21. Hedge funds;

22. Central banking and the supply of money (quantitative easing);

23. Advanced Valuation;

24. Finance for non-financials.

You can find the links to already published articles (for free) at the end of this blog (>50 articles).

Valuation oil and gas companies: An introduction

I have written many blogs already on valuation (you can find them at the end of this blog, or at my linkedin page), but there are a few special companies that are harder to valuate.

That’s why I have started a sequence of blogs on “Valuation of banks” (btw valuation of “insurance companies” will also follow soon).

And in this sequence I will write a series of blogs on the “Valuation of oil and gas companies”.

I was motivated to write this sequence of blogs on the “valuation of oil & gas companies” after reading a brilliant book on the subject.

There are not written many books on this specific subject, but I found at least one very nice one!

It was written in 2000 and re-printed in 2008. So it is a little outdated, but in the end still a very valuable resource.

And I have used this book as a source for this blog:

· Book: Valuing oil and gas companies: A guide to the assessment and evaluation of assets, performance and prospects – Second edition (2008). Authors: Nick Antill and Robert Arnott. Woodhead publishing limited.

In this sequence, I will talk about the following subjects:

1. The oil industry and its history;

2. The market for oil;

3. Accounting issues for oil companies;

4. Valuating “Oil exploration and production companies”;

5. Valuating “Integrated oil companies”.

The Oil Industry – Part 2

This is the 2nd blog in this sequence on valuating oil & gas companies.

In the 1st blog in this sequence I have started with discussing the history of the oil market since 1800 and the main players on the market.

In case you are interested in reading this first article in this sequence, it can be found on the link below:

Article 1: Valuating Oil & Gas Companies: The Oil Industry

https://www.dhirubhai.net/pulse/valuating-oil-gas-companies-industry-joris-kersten-msc-bsc-rab/

In this blog I will continue with discussing the oil industry with talking about the nationalisation of the oil concessions in the Middle East. Moreover, I will talk a little about the reserves of oil.

Companies in the Oil market: Continued

In the first blog in this sequence I have discussed the major oil companies set up from the start of the industry: Standard Oil and Royal Dutch/ Shell (name after the merger).

But the big growth in the US oil exploration activities at the end of the last century (1800s) resulted also in a number of smaller companies.

For example successful drilling in California in the late 1880s resulted in the company “Union Oil”.

And further success in the South of the US resulted in companies like Gulf Oil, Sun Oil and Texaco.

And all these companies could exist alongside the mighty “Standard Oil”, because the market was (and is) huge.

At the beginning of the 20th century also in the Middle East geological surveys for oil started to take place.

By 1909 it became clear there was oil potential in Iran and as a result the “Anglo-Persian” company was set up.

Later the British government invested in this company and eventually this company became BP (British Petroleum) in 1954.

(Antill & Arnott, 2008)

The “seven sisters”

The oil market grew very fast in the first half of the 20th century (1900 – 1950).

The discovery rates of oil fields were very high, as well as the demand for oil due to new technology.

This obviously also resulted in a growth in number of oil companies.

And therefore in the 1950s the name “seven sisters” came up.

This to describe the cartel of the 7 major oil companies consisting out of:

1. Exxon;

2. Mobil;

3. Chevron;

4. Texaco;

5. Gulf;

6. Royal Dutch/ Shell;

7. British Petroleum (BP).

The companies dominated the oil industry at the time (1950s).

But this is now diminished due to the trend of “nationalisation” from the 1950s onward.

Let’s not take a look at this “nationalisation”.

(Antill & Arnott, 2008)

Nationalisation

The first companies in the oil industry where all backed by individuals and institutions that were looking to maximise profits (all over the world).

By the 1930s was clear that the costs of producing oil in countries outside the US were significantly lower than within the US.

So as a result large profits were being made by foreign companies out of national reserves from countries in the Middle East.

But this was going to stop!

Iran (Persia) cancelled in the early 1930s the “Anglo-Persian” agreement already. However, a new agreement was ratified again only 1 year later.

The first real incident took place in 1938 when the Mexican government nationalised the oil industry and did not compensate any of the foreign companies (mostly American).

And during the 1940s and 1950s most host countries with oil started to tighten the grip on their own resources, this including most of the countries in the Middle East.

In the late 1940s new agreements were made again in Venezuela and Kuwait.

And in 1952 Iran nationalised the whole of its oil industry, so they basically put BP out of the game in Iran.

This was also done by Nigeria in 1979 when they nationalised all assets of BP (in Nigeria).

And by 1973 the original “concessions” in both Venezuela and Kuwait were effectively terminated.

So oil companies in these regions could only operate under service agreements since then.

(Antill & Arnott, 2008)

Saudi Arabia with “Aramco”

The last major oil producer that nationalised its oil industry was Saudi Arabia.

In Saudi Arabia oil was exploited by a consortium of companies known as “Aramco”.

This consortium consisted out of:

1. Exxon;

2. Chevron;

3. Mobil;

4. Texaco.

In 1950 the venture Aramco held 50% of the concessions in Saudi Arabia, so they had the rights on 50% of the oil in the ground in Saudi Arabia.

But by 1974 this fell to 40%.

And it went even worse for the consortium (Exxon, Chevron, Mobil and Texaco), because still in 1974 the government of Saudi Arabia made clear that it wanted the full 100% of the concession.

In 1976 the deal was effectuated, and afterwards the consortium still had some tasks in the oil industry concerning operations and technical service for a fee of 0.21 USD bbl (per barrel).

Nowadays the main producer countries own the bulk of their reserves, and the major companies are the producers.

(Antill & Arnott, 2008)

Reserves and production: Oil

In this paragraph I will look at the reserves of oil.

But although there are lot of books available on (general) valuation, this is very limited for specific “valuation of oil companies”. And I do medium sized deals, and valuations, in production and services companies in The Netherlands, so no oil & gas. ?

This is why my source used for this blog is rather old. In general this is not a problem since the source is very good on valuation techniques. But when looking at the reserves of oil, the picture given is obviously NOT completely contemporary.

So please do not forget the estimations date back from 1999-2000.

In 1999 the world’s total proven oil reserves were close to 1,000 billion barrels.

And about 75% estimated to be in OPEC countries, particular in the Middle East.

Russia accounted for about 5% and the rest of the world had about 20% of the reserves.

From the OPEC producers, Saudi Arabia had about 25%, and Iraq (11%), iran (9%) and Kuwait (9%) together about 30%.

Out of the Middle East Venezuela and Mexico had about 11%, the US about 3%, and Africa about 7%.

(Antill & Arnott, 2008)

In the next blog in the sequence I will look shortly at the reserves for gas. And then I will jump into the (commercial) markets for oil.

In the blog after that we will look at some accounting issues for oil companies. And after that we can look at the actual subjects of this sequence:

1. Valuating “Oil exploration and production companies”;

2. Valuating “Integrated oil companies”.

Stay tuned!

Source

I was motivated to write this sequence of blogs on the “valuation of oil & gas companies” after reading a brilliant book on the subject.

There are not written many books on this specific subject, but I found at least one very nice one.

It was written in 2000 and re-printed in 2008. So it is a little outdated, but in the end still a very valuable resource. And I have used this book as a source for this blog:

Under here you can find the links to my previous free articles (about 50) on business valuation.

Earlier blogs on “net debt” (cash & debt free)

Article 1: Valuation: Introduction to "net debt" (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-introduction-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 2: Valuation: Net debt (cash & debt free)

https://www.dhirubhai.net/pulse/valuation-net-debt-cash-free-joris-kersten-msc-bsc-rab/

Article 3: Valuation: Adjusted net debt – Cash like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-cash-like-items-kersten-msc-bsc-rab/

Article 4: Valuation: Adjusted net debt – Debt like items

https://www.dhirubhai.net/pulse/valuation-adjusted-net-debt-like-items-joris-kersten-msc-bsc-rab/

Earlier blogs on “valuation of banks”

Article 1: Valuation of Banks: Business models of Banks

https://www.dhirubhai.net/pulse/valuation-banks-business-models-joris-kersten-msc-bsc-rab/

Article 2: Bank Valuation: Financial Statements of Banks (part 1)

https://www.dhirubhai.net/pulse/bank-valuation-financial-statements-banks-part-1-joris/

Earlier blog on “Valuation of Oil & Gas Companies”

Article 1: Valuating Oil & Gas Companies: The Oil Industry

https://www.dhirubhai.net/pulse/valuating-oil-gas-companies-industry-joris-kersten-msc-bsc-rab/

Earlier blogs on “Debt & Leverage”

Article 1: Debt: Ratio “debt/ GDP” in the US, The Netherlands, Germany and Japan

https://www.dhirubhai.net/pulse/debt-ratio-gdp-us-netherlands-germany-japan-kersten-msc-bsc-rab/

Article 2: Debt: Why global debt increased over the last 100 years

https://www.dhirubhai.net/pulse/debt-why-global-increased-over-last-100-years-kersten-msc-bsc-rab/

Article 3: Debt of companies: Leverage, Private Equity, Solvency and Bankruptcy

https://www.dhirubhai.net/pulse/debt-companies-leverage-private-equity-solvency-kersten-msc-bsc-rab/

Earlier blogs on “Weighted Average Cost of Capital (WACC) – step by step”

Article 1: Capital Market History Lessons – Corporate Finance (part 1)

https://www.dhirubhai.net/pulse/capital-market-history-lessons-corporate-finance-part-joris/

Earlier blogs on Financial Modelling

Article 1: Financial Modelling in Excel: Circular references, interest calculations and iterations

https://www.dhirubhai.net/pulse/financial-modelling-excel-circular-references-kersten-msc-bsc-rab/

Article 2: Excel basics for Finance: SUM, MAX, MIN, AVERAGE, IF, cell referencing, named ranges

https://www.dhirubhai.net/pulse/excel-basics-finance-sum-max-min-average-cell-named-joris/

Article 3: Excel for Valuation: COUNTIF, VLOOKUP, INDEX and MATCH

https://www.dhirubhai.net/pulse/excel-valuation-countif-vlookup-index-match-kersten-msc-bsc-rab/

Article 4: Excel for Business Valuation: OFFSET, FORECAST and CHOOSE

https://www.dhirubhai.net/pulse/excel-business-valuation-offset-forecast-choose/

Article 5: Excel for Business Valuation: NPV, IRR, PMT and EOMONTH

https://www.dhirubhai.net/pulse/excel-business-valuation-npv-irr-pmt-eomonth-kersten-msc-bsc-rab/

Article 6: Excel for Business Valuation: Custom Formatting, Conditional Formatting and Sparklines

https://www.dhirubhai.net/pulse/excel-business-valuation-custom-formatting-sparklines-joris/

Earlier blogs on “various topics”

Article 1: Financing a M&A transaction: An introduction

https://www.dhirubhai.net/pulse/financing-ma-transaction-introduction-joris-kersten-msc-bsc-rab/

Article 2: Valuation: How to adjust for “Operating Lease” (under Dutch GAAP)

https://www.dhirubhai.net/pulse/valuation-how-adjust-operating-lease-under-dutch-gaap-joris/

Article 3: M&A closing mechanisms: Locked Box & Completion Accounts

https://www.dhirubhai.net/pulse/ma-closing-mechanisms-locked-box-completion-accounts-joris/

Article 4: Scoping a financial model built primarily for business valuation:

https://www.dhirubhai.net/pulse/scoping-financial-model-built-primarily-business-joris/

Article 5: Consolidation of M&A targets and Purchase Price Allocation (PPA)

https://www.dhirubhai.net/pulse/consolidation-ma-targets-purchase-price-allocation-joris/

Article 6: Economics: Do economies have to grow to maintain the same level of prosperity ???

https://www.dhirubhai.net/pulse/economics-do-economies-have-grow-maintain-same-level-joris/?trackingId=OewoybLMTX6NbnlEzkOWmw%3D%3D

Earlier blogs on “bonds”

Article 1: Bonds - An introduction

https://www.dhirubhai.net/pulse/corporate-finance-bonds-introduction-joris-kersten-msc-bsc-rab/

Article 2: Bonds & Bond Markets

https://www.dhirubhai.net/pulse/bonds-bond-markets-corporate-finance-joris-kersten-msc-bsc-rab/

Article 3: Bonds, Rating Agencies and Credit Ratings

https://www.dhirubhai.net/pulse/bonds-rating-agencies-credit-ratings-joris-kersten-msc-bsc-rab/

Earlier blogs on “Valuation & funding of start-ups”

Article 1: Valuation & funding of start-ups - Funding rounds

https://www.dhirubhai.net/pulse/valuation-funding-startups-rounds-joris-kersten-msc-bsc-rab/

Article 2: Startup valuation: Pre-money and post-money valuation

https://www.dhirubhai.net/pulse/startup-valuation-pre-money-post-money-joris-kersten-msc-bsc-rab/

Article 3: Valuation methods for Startups (early stage) – Part 1

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-1-kersten-msc-bsc-rab/

Article 4: Valuation methods for Startups (early stage) – Part 2

https://www.dhirubhai.net/pulse/valuation-methods-startups-early-stage-part-2-kersten-msc-bsc-rab/

Article 5: Startups in Silicon Valley: The beginning – Part 1

https://www.dhirubhai.net/pulse/startups-silicon-valley-beginning-part-1-joris-kersten-msc-bsc-rab/

Article 6: Startup Funding & Convertible Debt (part 1)

https://www.dhirubhai.net/pulse/startup-funding-convertible-debt-part-1-joris-kersten-msc-bsc-rab/

Earlier blogs on “Mergers & Acquisitions (M&As)” and “M&A transactions”

Article 1: M&A Transactions: Share Deals, Asset Deals and Legal Mergers and Divisions

https://www.dhirubhai.net/pulse/ma-transactions-share-deals-asset-legal-mergers-kersten-msc-bsc-rab/

Earlier blogs on “Business valuation to Enterprise Value”

From June until August I have written the following blogs on valuation:

1) Leveraged Buyout (LBO) Analysis:

https://www.dhirubhai.net/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/

2) M&A Analysis – Accretion/ Dilution:

https://www.dhirubhai.net/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/

3) Discounted Cash Flow Valuation:

https://www.dhirubhai.net/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/

4) Valuation Multiples 1 – Comparable Companies Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-1-comparable-companies-analysis-joris

5) Excel Shortcuts & Business Valuation:

https://www.dhirubhai.net/pulse/excel-shortcuts-business-valuation-joris-kersten-msc-bsc-rab

6) Valuation Multiples 2 – Precedent Transaction Analysis:

https://www.dhirubhai.net/pulse/valuation-multiples-2-precedent-transaction-kersten-msc-bsc-rab

Earlier blogs on “Energy Transition”

Article 1: Energy transition: Introduction to Sustainable/ Renewable Energy

https://www.dhirubhai.net/pulse/energy-transition-introduction-sustainable-joris-kersten-msc-bsc-rab/

Article 2: Energy transition: Energy mix of The Netherlands & Goals for co2 reduction

https://www.dhirubhai.net/pulse/energy-transition-mix-netherlands-goals-co2-reduction-joris/

Earlier blogs on Wall Street

Article 1: Wall Street – A general introduction

https://www.dhirubhai.net/pulse/wall-street-general-introduction-joris-kersten-msc-bsc-rab/

Article 2: Wall Street – The Federal Reserve banking system

https://www.dhirubhai.net/pulse/wall-street-federal-reserve-banking-system-kersten-msc-bsc-rab/

Earlier blogs on the “cost of capital”

Article 1: Valuation & Betas (CAPM)

https://www.dhirubhai.net/pulse/valuation-betas-capm-joris-kersten-msc-bsc-rab/

Article 2: Valuation & Equity Market Risk Premium (CAPM)

https://www.dhirubhai.net/pulse/valuation-equity-market-risk-premium-capm-joris-kersten-msc-bsc-rab/

Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)

https://www.dhirubhai.net/pulse/capital-asset-pricing-model-dead-capm-joris-kersten-msc-bsc-rab/

Article 4: Valuation & the cost of debt (WACC)

https://www.dhirubhai.net/pulse/valuation-cost-debt-wacc-joris-kersten-msc-bsc-rab/

Article 5: Valuation & Capital Structure (WACC)

https://www.dhirubhai.net/pulse/valuation-capital-structure-wacc-joris-kersten-msc-bsc-rab/

Article 6: International WACC & Country Risk – Part 1

https://www.dhirubhai.net/pulse/valuation-international-wacc-country-risk-part-1-joris/

Article 7: International WACC – Part 2

https://www.dhirubhai.net/pulse/valuation-international-wacc-part-2-joris-kersten-msc-bsc-rab/

Article 8: Present Values, Real Options, the Dot.com Bubble

https://www.dhirubhai.net/pulse/valuation-present-values-real-options-dotcom-bubble-joris/

Article 9: Valuation: Different DCF & WACC techniques

https://www.dhirubhai.net/pulse/valuation-different-dcf-wacc-techniques-joris-kersten-msc-bsc-rab/

Article 10: Valuation of a company abroad

https://www.dhirubhai.net/pulse/valuation-company-abroad-joris-kersten-msc-bsc-rab/

Article 11: Valuation: Illiquidity discounts, control premiums and minority discounts

https://www.dhirubhai.net/pulse/valuation-illiquidity-discounts-control-premiums-joris/

Article 12: Valuation: Small firm premiums

https://www.dhirubhai.net/pulse/valuation-small-firm-premiums-joris-kersten-msc-bsc-rab/

Earlier blogs on Financial Due Diligence