Valuation Energy Assets and Cos

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Educational

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Valuation of EnergyAssets and Companies:E&P Operations, ShaleGas and Pipelines

Were Not Only inTexas Anymore

John C. Butler, Ph.D. | The University of Texas at AustinMcCombs School of Business

Austin, Texas

Robert S. Moore, II | Grant Thornton LLP; Houston

Robert Parrino, Ph.D., Presiding

Officer |The Universi ty of Texas at Austin

McCombs School of Business

Austin, Texas

Technical Track A


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We're Not (Only) in Texas Anymore

Valuation of Oil and Gas

Companies and Assets

John Butler

! Clinical Associate Professor of Finance!Academic Director of the Energy

Management and Innovation Center

! McCombs School of Business, University ofTexas at Austin

! Teach : Energy Valuation, Risk Management,Model Building

! Research: Risk & Decision Analysis

Valuation of Oil and Gas Companies and Assets2


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Rob Moore!A Director with Grant Thornton, based in the

Houston office. Rob has managed and beeninvolved with both out-of-court and in-courtenergy related engagements where he hasadvised secured creditors, debtors, investors,professionals, and trustees.

! Consulting Services Provided, include:!

business plan analysis, cash flow modeling and analyses, structuringand negotiating debt and equity financing, liquidation analyses, providingfairness opinions, valuations, sales and dispositions of assets orbusinesses, formulation of plans of reorganization and disclosurestatements, related bankruptcy consulting, public and private financingand acquisition transactions


Resources, Economics, Water &Access

Shale Revolution


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0

20

40

60

80

100

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QuadrillionBtu

U.S. Primary Energy Consumption by Major Source, 1949-2010

Source: U.S. Energy Information Administration Annual Energy Review, Table 1.3

US Energy Consumption

Increasing

Fossil Fuels

Renewables

Nuclear


Renewable Energy as Share of

Total Primary EnergyConsumption, 2010



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Proved = Very likely Reserves


Game Changer:

Unconventional Natural Gas



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Horizontal vs. Vertical

http://www.horizontaldrilling.org/Valuation of Oil and Gas Companies and Assets10


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Hydraulic Fracturing

Source: Al Granberg, Hydraulic fracturing., http://nedgrace.files. wordpress.com/2009/07/hydro.jpg, July 2009.Valuation of Oil and Gas Companies and Assets11

Shale Gas Production Uses Injected

Materials To Cause Fractures andHold Them Open

Injected materials for shale gas fracturing & productionSource: Chesapeake Energy, May 2009



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Carrizos 22-well pad at UTA

Tarrant County, Texas!According Carrizo estimates:

! Total drainage area of 1100 acres! EUR of 110 bcf over 25 years! 5 bcf per well! At $5/mcf gas, $550 million in production revenue! Roughly $140 million to 1500 royalty owners

! UTA has 391 acres, worth tens of millions infuture royalties

Article by Jack Smith, Fort Worth Star Telegram, 10/1/2010


Carrizo location UT Arlington

Barnett drilling locationUniversity of Texas at Arlington

From XTO annual reportValuation of Oil and Gas Companies and Assets14


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One mile



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2009


2011


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Efficiency Improvements


Production Process

! We know the gas is there! How do we get it out the most efficiently?! When?

! Steep drop-off in production

Volume

Months

Vertical Gas Well

Horizontal Gas Well

12 120



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Access to Resources! Regulation! Environmental concerns of hydraulic fracturing

! Groundwater contamination! Surface water handling

! Water Use! 5-8 million gallons per well! Average golf course 300,000 gallons/ day

! 114,000,000 gallons / year! 16,000 courses in US


Rainfall



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Oil & Gas

! Bakken and Eagle Ford formations are EACHexpected to yield 4 Billion Barrels of oil

! 5th& 6thlargest US fields in HistoryValuation of Oil and Gas Companies and Assets27

Natural gas is cheaper in US than in

Europe and Asia

UK US Japan Europe

Source: Cheniere Energy, BloombergValuation of Oil and Gas Companies and Assets28


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US futures curve calls for

prolonged oil gas divergence

Source: BloombergValuation of Oil and Gas Companies and Assets29

Basin Breakeven Economics

Source: BentekEnergyValuation of Oil and Gas Companies and Assets30


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Energy Supply Chain


Types of E&P Assets and LiabilitiesAssets:

Working Capital Oil and Gas Reserves Hydrocarbon Inventory Hedging Instruments Other Fixed Assets

Gathering systems, helicopters, landing pads, boats, etc) Seismic Data Permits and Licenses Contracts

Liabilities:Asset Retirement Obligations Environmental Liabilities Pre-emptive Rights Debt

*** Transactions are typically structured as asset purchases.



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Total Worldwide Upstream

Transaction Value by Deal Level


Year-End 2011 Statistical Snapshot



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Reserve Categories:

Proved (1P)! Proved reserve categories include:

! Proved Developed Producing (PDP)! Proved Developed Non-producing (PDNP)! Proved Undeveloped (PUD)

! Commonly referred to as "1P" or "proven"reserves

! Estimates of reserves that can be recovered withreasonable certainty from a given date forwardfrom known reserves

! 90% probability that 1P reserves successfullyextracted will equal or exceed estimate of reserve


Reserve Categories :

Probable Reserves (1)

Unproved reserve estimates that are likely to be recoveredfrom a given date forward and include the followingcharacteristics:

! Reserves anticipated to be proved by normal step-out drillingwhen sub-surface control is inadequate

! Reserves in formations that appear to be productive but lack coredata or definitive tests

! Incremental reserves attributable to infill drilling that could havebeen proved based on statutory spacing

! Reserves attributable to the improved recovery methods thathave been established by repeated successful attempts! when a project or pilot is planned but not in operation! when rock, fluid, or reservoir characteristics appear favorable for commercial

attempts



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Probable Reserves (2)Unproved reserve estimates that are likely to be recoveredfrom a given date forward and include the followingcharacteristics:

! Reserves that seem to be separated from proved reserves due tofaulting

! Reserves attributable to a future workover, treatment,retreatment, procedure change, or other procedures

! Incremental reserves in proved area where interpretation of datamay indicate more the likelihood of more proved

! 2P = Proved + Probable! 50% probability 2P that reserves successfully extracted

will equal or exceed estimate of reserve



Possible Reserves

! Unproved reserve estimates that are lesslikely to be recovered given current economicconditions, operating methods, etc.

! 3P = Proved + Probable + Possible

! 10% probability that 3P reservessuccessfully extracted will equal or exceedestimate of reserve



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Valuation Methods

Assets

1.DCF ending atreserve life

2.Asset transactions

Enterprises

1.DCF with terminalvalue (possibly)

2.CorporateTransactions

3.Public CompanyMethod


Valuation Section 2

Income Approach 1. The Basics2. Income Approach

3. Market Approach

4. Asset Retirement Obligation


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Reserve Reports

! Engineering firm! SEC Style vs. Internally Prepared Reports! Risked vs. Unrisked! Pricing Assumptions! What is PV-10?


Adjusting Reserve Reports to Derive

Valuation Cash Flow Stream

! Risking! What is risking?! What do you need to risk?! Where to find guidance on risking?

! Pricing! Forward strip! Basis adjustments

! General and Administrative Expenses! Terminal Value?



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Capital Expenditures! Drilling vs. Completion

! Tangible vs. Intangible! Up to 100% of IDC is expensed! Tangible capital expenditures must be capitalized


Discount Rate Considerations

! Taxable vs. Non-taxable entities

! Cost of Debt

! Selection of Guideline Companies



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Valuation Section 3

Market Approach 1. The Basics2. Income Approach

3. Market Approach

4. Asset Retirement Obligation

Industry-Specific Multiples

! EV / BOE Proved Reserves! Approx. range of $10 $20 per BOE of proved

reserves

! EV / Daily Production! Approx. range of $50,000 - $150,000 per BOE of daily

production

! EV / PV-10 Value! Approx. range of 1x 3x of PV10! EV / EBITDAX! EV / 2P Reserves! EV / 3P Reserves



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Types of Transactions

!Asset

! Corporate

** Be careful to consider the type of information reported (e.g. SEC style reserves andPV-10 or risked internal estimates, etc.)


Guideline Public Company

Method

! When is this method appropriate?

! Data issues:! Size! Timing of public company reserve data! PV-10 vs. the subject company (Proved Only)! Reserves vs. the subject company



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Valuation Energy Assets and Cos

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