u.s. independent oil & gas sector: 2010 valuation trends
DESCRIPTION
U.S. Exploration & Production Sector Statistical Analysis. This is an assessment of the U.S. E&P sector from Q1 '07 through Q3 '09 and what the trends for the sector are moving into 2010. A range of key E&P valuation metrics for 2010 are estimated as the final stage in the analysis. The report draws from a comprehensive data assessment of 84 U.S. based Exploration & Production companies.TRANSCRIPT
U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production. Drawing from a sample of over 85 publicly traded U.S. based E&P firms, profiles were developed to gauge and assess trends in the sector between 2007 and 2009. The paper first establishes the over-arching trends in the U.S. E&P sector, discusses the key valuation drivers and then applies the analysis to establish a framework to estimate key valuation metrics for 2010.
2010
Marcus Wolters
1/1/2010
DISCLAIMER
The information and opinions in this report were prepared by Marcus
Wolters. The information herein is believed to be accurate and reliable
and has been obtained exclusively from public sources believed to be
reliable. The author makes no representation as to the accuracy or
completeness of such information.
The material contained in this report is for information purposes only
and is not an offer or solicitation with respect to the sale or purchase of
any security.
Page 1
© 2009 Marcus Wolters. All Rights Reserved
U.S. Based E&P Companies
Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
Key Sector Trends: Q1 ’07 through Q3 ‘09 ....................................................................................................................................... 3
Market Capitalization Peaked in mid-2008 .................................................................................................................................. 3
Long-term Debt Grew Through 2008 ........................................................................................................................................... 3
Average Price Received Collapsed Rapidly Post Q2 ‘08 ............................................................................................................... 3
Reserves Re-valued at Lower Benchmark Prices at YE 2008 ........................................................................................................ 4
Market Cap and Enterprise Value Trend by Sub-Groups .................................................................................................................. 4
Production Groups ....................................................................................................................................................................... 4
Commodity Focus ........................................................................................................................................................................ 4
Enterprise Value, Market Cap and Book Capitalization ............................................................................................................... 5
Enterprise Value to EBITDA ............................................................................................................................................................... 5
U.S. E&P Sector Overview ............................................................................................................................................................ 5
Key Valuation Considerations for 2010 ........................................................................................................................................ 5
Revenue Structure .................................................................................................................................................................. 5
Debt versus Reserves .............................................................................................................................................................. 5
Return Measures ..................................................................................................................................................................... 6
Drilling and Production ........................................................................................................................................................... 6
Benchmark Commodity Price Drivers ..................................................................................................................................... 6
WTI versus Henry Hub ............................................................................................................................................................. 6
New SEC Reserve Reporting Standards ................................................................................................................................... 7
Production Group Comparison of EV to EBITDA .......................................................................................................................... 7
Market Capitalization to Production ................................................................................................................................................. 8
U.S. E&P Sector Overview ............................................................................................................................................................ 8
Market Cap and Production Size .................................................................................................................................................. 8
Why Fundamentals Matter ............................................................................................................................................................... 9
What are the Objectives of Fundamentals Analysis? ................................................................................................................... 9
Mitigate the Price Effect and Focus on the Drivers ...................................................................................................................... 9
Identify the Key Drivers ................................................................................................................................................................ 9
Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals .............................................................. 10
Translation into Other Metrics................................................................................................................................................... 10
How Fundamental E&P Drivers Translate into Market Valuations ............................................................................................ 11
Market Cap versus Daily Production ..................................................................................................................................... 11
Enterprise Value to EBITDA ................................................................................................................................................... 11
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© 2009 Marcus Wolters. All Rights Reserved
U.S. Based E&P Companies
Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
Price to CFPS (Trailing Twelve Months) ................................................................................................................................. 11
Two Scenarios for 2010 .................................................................................................................................................................. 12
Assessing the Value of Market Cap to Production ..................................................................................................................... 12
2010 Prices Rise, Cost Pressures ................................................................................................................................................ 12
2010 Prices Weaken, Costs Ease ................................................................................................................................................ 12
2010 Valuation Ranges - Production Groupings. ....................................................................................................................... 13
Final Comments ......................................................................................................................................................................... 13
Data Summary ................................................................................................................................................................................ 14
Data Collection and Management ............................................................................................................................................. 14
Companies Surveyed .................................................................................................................................................................. 15
Financial and Production Summary, Q1 ’07 – Q3 ‘09 ................................................................................................................. 16
Financial Recap...................................................................................................................................................................... 16
Production and Average Price Recap .................................................................................................................................... 16
Brief Glossary ............................................................................................................................................................................. 17
Author’s Bio .................................................................................................................................................................................... 18
Notes .............................................................................................................................................................................................. 19
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© 2009 Marcus Wolters. All Rights Reserved
$46$49 $49
$59$62
$74$72
$57
$36$39 $41
$30
$40
$50
$60
$70
$80
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Average Price Received
($US per BOE)
Inlcudes realized hedging gains/losses
$0
$20
$40
$60
$80
$100
$120
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Long-term Debt
($US Billions)
$0
$100
$200
$300
$400
$500
$600
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector
Market Cap and Enterprise Value($US Billions)
-$285 Billion+$250 Billion
Market Cap
Net Debt
U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
The behavior in crude oil and natural gas prices from the start of 2007 through 2009 provided a unique opportunity to see not
only how the markets responded during the economic turmoil but also to assess the impact on the E&P firm and provide a
landscape for 2010. From the events of 2008 we were reminded the importance of placing E&P fundamentals firmly ahead of
commodity price projections in assessing the future health of the sector. The high commodity price environment in the first
half 2008 brought with it a whole new set of profitability and growth expectations and those optimistic outlooks needed to be
looked at in more realistic terms since then.
Key Sector Trends: Q1 ’07 through Q3 ‘09
Market Capitalization Peaked in mid-2008
Nothing particularly good came from the rapid rise in commodity
prices through the middle of 2008. Driven by the toxic combination of
the credit crisis, the global economic downturn and the collapse of a
fundamentally mispriced crude oil and natural gas market, the
aggregate market value of the U.S. E&P sector had cratered by the
spring of 2009i. By Q1 ’09, in the span of nine months, $300 Billion of
market capitalization ($285 Billion in Enterprise Value) was carved out
of the sector, more than any value created since the start of 2007.
Long-term Debt Grew Through 2008
The E&P sector added over $30 Billion in debt before the economic
crisis took over in late 2008. The long-term debt level has hit a
plateau since then. E&P firms could have used the high cash flow
period to pay down some debt and set themselves up for a more
sober pricing environment with a healthier capital structure – but now
some are ill-positioned with weaker profiles and operating in a low
price environment. Due to the combination of frozen credit and the
E&P sector leery of adding debt in the low-price period, many firms
kept their exploration and development programs in-line with cash
flow throughout 2009. Appetite for credit, from both sides of
equation, has recovered through 2009 - for the E&P sector in general,
increasing commodity prices through 2009 has been the incentive.
Average Price Received Collapsed Rapidly Post Q2 ‘08
The U.S. E&P sector is heavily weighted towards natural gas
production – roughly two-thirds of production is natural gas. The
average price received by the E&P firm ($US per BOE) was cut in half
by Q2 ’09, and is recovering. But because of the high gas weighting,
this needs to be examined a bit closer. While crude oil prices plunged
mid-year 2008 and since recovered somewhat, natural gas prices have
not and the historical relationship between the two is broken. One of
the reasons is that natural gas supply dynamics have changed
dramatically over the past 2-3 years with the advent of
unconventional resource development.
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© 2009 Marcus Wolters. All Rights Reserved
-50%
0%
50%
100%
150%
200%
250%
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Market Cap Growth/Decline since January 2007
Oil Focus versus Gas Focus
Oil Focus
Gas Focus
Reserves Re-valued at Lower Benchmark Prices at YE 2008
At the end of 2008, E&P companies revalued their proved reserves
(for SEC reporting) using much lower commodity prices than in 2007,
the result being a significant reduction in the PV of reserves and
record impairment charges on the income statement. Based on our
sample of 90 U.S.–based E&P firms, the sector’s SEC PV10
Standardized Measure was reduced in aggregate by over $125 Billion
between ’07 and ‘08. And notwithstanding the issues surrounding the
use of the SEC PV10 as it is determined today and the inherent
conservatism in evaluating proved reserves, this was a strong
indicator that the underlying asset value had fundamentally changed.
At the same time, the sector took reserve and asset impairment
charges of over $40 Billion in 2008, which dwarfed any previous years’
impairment charges.
Market Cap and Enterprise Value Trend by Sub-Groups
Production Groups
To make better sense of the U.S. E&P landscape, the sector is split (or stratified) into production sub-groupsii, and this helps
show the characteristics of asset size - an important function in E&P analysis. Not one single E&P in our universe avoided the
affects from the downturn in product prices. As the table below suggests, larger producers (Intermediate and up) are back to
where they started in 2007. The average market value of Junior producers is far less now than what it was at the start of 2007.
Table 1: Production profile and Market Cap by Production Group
Production Group E&P
Count in
Analysis
Avg Daily
Production
(MBOE)
% Gas Average
Market Cap
Q1 ‘07
Average
Market Cap
Q2 ‘08
Average
Market Cap
Q3 ‘09
Junior 40 4.1 65% $323.0 Million $598.0 $259.0
Intermediate 34 34.4 68% $1.9 Billion $4.4 $2.4
Senior 7 108.0 65% $5.2 Billion $10.3 $6.5
Super Independent 6 477.0 67% $21.2 Billion $39.9 $25.0
Commodity Focus
Isolating crude producers and comparing them with gas producers
provides another aspect into how commodity price patterns affect
market value. This is particularly useful in sensitivity analysis under
various price environments.iii
The figure to the right compares 10 E&P’s with a high crude
production focus (75% of production, on average) versus 10 E&P’s
with a high gas focus (95% of production). The market value of oil-
focused E&P’s doubled in eighteen months only to lose that and more
in the next seven.
5.3 4.8
5.6
7.4
3.6
4.9
2.0
20
02
20
03
20
04
20
05
20
06
20
07
20
08
U.S. E&P Sector SEC PV10 Value per BOE Reserves
Proved Developed Reserves
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© 2009 Marcus Wolters. All Rights Reserved
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Enterprise Value as a % of Market Capitalization
Junior
Intermediate
Senior Super Independent
25%
30%
35%
40%
45%
50%
55%
60%
65%
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Debt to Capitalization (%) by Production Group
Junior
Intermediate
Senior
Super Independent
Enterprise Value, Market Cap and Book Capitalization
An intuitive way to see how Enterprise Value diverges from Market
Cap is to divide one into the other: the EV to MC measure, which
averaged 1.3 from Q1 ’07 to Q2 ’08, grew to 2.8 by Q2 ’09, implying
that debt comprised a much larger share of total Enterprise Value.
The figure to the right shows that as the production size increased,
market cap was less and less affected.
But it is no coincidence smaller producers experienced the largest divergence. It can be shown historically that the variance in share price risk/return of smaller producers is much wider than larger production groups to begin with. And since 2007, smaller producers added debt at a much faster rate than larger producers, causing wide mismatches in capital structure. In the span of just over 2 ½ years the average debt to cap increased from 35% at Q1 ’07 to 58% at Q2 ’09, and this served to make the impact of the fall in share price even more pronounced.
The question remains: how long will it take for this highly-leveraged
sector to return to normal? It is clear the credit risk profile for the
entire sector has already been in decline even prior to 2007, but the
negative price shock that occurred so swiftly in 2008 (the brunt of it in
six months) only compounded the problem. Moving into 2010, the
capital structure of the E&P sector has fundamentally shifted; this will
take a significant amount of time to correct itself.
Enterprise Value to EBITDA
U.S. E&P Sector Overview
From 2002 through 2007 the average EV to EBITDA multiple for the
U.S. E&P sector ranged between 5.5 and 12.5, averaging 8.9 Times.
This “norm” so to speak has been broken both on the upside and the
downside beginning in 2008. Corresponding with the trend in crude
oil prices, the metric peaked in Q2 ’08 but rapidly collapsed to lows
not seen this decade.
Even with a crude oil price recovery (WTI has more than doubled
since Q1 ’09) this widely used metric will have a difficult time in 2010
stabilizing within bounds that once were considered appropriate.
There are a number of solid reasons for that, as described below.
Key Valuation Considerations for 2010
Revenue Structure: Gas prices will likely remain flat, demand will be
stable, and the E&P sector is heavily weighted to natural gas
production. In the short-term, inventory levels moving into winter
are at record levels and per-capita usage is down slightly. For the
long-term, unless there is a more serious initiative to move
structurally away from coal-fired electricity generation to natural gas
fired generation, demand growth will be mitigated.
Debt versus Reserves: From 2004 the relationship between debt and
reserves has been deteriorating. While Debt per BOE reserves has
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
20
02
20
03
20
04
20
05
20
06
20
07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector
Enterprise Value to EBITDA Multiple
Quarterly Multiples based onTrailing Twelve Months (TTM) EBITDA
4.6
5.6 5.5 5.4
7.0
3.8
7.4
4.6
8.5
2.0
Debt to PDR SEC PV10 to debt
2004
2005
2006
2007
2008
U.S. E&P Sector Debt to Proved Developed Reserves, PV10 to Debt
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© 2009 Marcus Wolters. All Rights Reserved
been increasing, the actual value of the reserves has been decreasing (see figure on previous page). This will almost necessarily
place capital structure and strategic limitations on future earnings potential.
Corporate Netbacks and Returns: In 2008, the Corporate Netback
margin (Average Price Received minus all pre-tax cash costs) was cut
in half in the span of one quarter and has marginally recovered since
then. For 2009 the margin will likely exit the year at roughly 40%,
which is still much lower than the average of 56% in prior years. This
will take time to recover, especially in light of the commodity price
outlooks that might prevail for 2010. The production and ad valorem
tax component of operating costs will be significantly lower as the
taxes are a function of the price received.
Return Measures: Return on Equity (along with P/E and other return-
related metrics) became un-measurable in 2008 and not much better
in 2009. Net earnings in 2008 were extremely poor for the year and 2009 results, although stronger than 2008, are lower than
in years past. Over 40 E&P’s reported losses in 2008 and the aggregate sector net income was $1.29 Billion. This was due in
large part by the size of asset impairment charges that were taken. By comparison the exact same set of E&P firms reported
net income of $18.9 Billion in 2007. The expectation for the sector in 2010 is that key return, profitability and netback metrics
will not likely return to the levels seen in ’02-’07, and valuation metrics will also continue to be lower.
Drilling and Production: Operating costs on a BOE basis in 2009 are lower than in 2008, some of this driven by lower Production
Taxes due to low commodity prices. This is a plus. But this will likely not compensate for the stagnant and low natural gas
prices which will suppress netbacks. Drilling costs have been lower as well from 2007-2008, which strengthens the F&D cost
and enhances the recycle ratios. Drilling activity, however, will not likely recover to ‘07 – ‘08 levels and reserve and production
growth will be limited.
Benchmark Commodity Price Drivers: The factors that determine the price of a barrel of crude have drifted further beyond
supply/demand fundamentals. For example, with crude hovering at about $US 70 per Barrel, the discussion is not so much
these days about supply/demand fundamentals but rather how playing WTI against the U.S. exchange rate will affect price and
exchange rates.
Until there is clearer understanding of the price drivers, from a fundamental standpoint we cannot forecast the price of WTI
with any great confidence solely on the basis of supply/demand. And there have been recent events to indicate that WTI might
be losing its power while still being the key North American benchmark price. For example, Saudi Aramco recently announced
it will use the Argus Sour Crude Index for its U.S. deliveries over WTI as it better reflects the crude characteristics. In addition,
Gulf Coast pricing/volumes are more liquid and transparent. Kuwait has followed in the same footsteps. Moreover, WTI prices
will continue to be distorted from time to time against other crude prices and remain volatile in the near-term because of local
distortions and the actual trading point – Cushing, Oklahoma – is land locked.
WTI versus Henry Hub: The relationship between oil prices and natural
gas prices continues to diverge and weaken (see right). Before 2005
the relationship between WTI and Henry Hub was fairly predictable:
natural gas prices would move roughly in tandem with oil prices. Since
then a number of factors have transformed the nature of the North
American natural gas market, and oil prices no longer have the same
drawing power:
1. Continental gas supply has increased with the development of
unconventional resources. LNG and Northern gas (Alaska,
MacKenzie Valley) supplies, which were once considered the
solution to the dwindling continental supply base, have really
52%54%
57% 57% 57%55% 53%
62%60%
47%
32%
40%38%
20
02
20
03
20
04
20
05
20
06
20
07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector
Corporate Netback as a percent of Average Price Received
Source: Bloomberg
0
5
10
15
20
25
Jan
-99
Jul-
99
Jan
-00
Jul-
00
Jan
-01
Jul-
01
Jan
-02
Jul-
02
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Henry Hub
WTI
U.S. E&P SectorWTI versus Henry Hub, 1999 - 2009
($US per MMBtu Basis)
1 Barrel = 5.825 MMBtu Data Source: Bloomberg
Page 7
© 2009 Marcus Wolters. All Rights Reserved
been pushed out of main consideration.
2. For 2010, gas- in- storage volumes are at record levels. Unless the winter heating season is consistently colder (much
colder), winter season prices will be suppressed.
3. Fuel switching capabilities: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices
closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between
natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward
trend with crude oil prices but with considerable independent movement.
New SEC Reserve Reporting Standards: From www.sec.gov: On June 26th
, 2008 the SEC announced that it has proposed revised
oil and gas company reporting requirements to help provide investors with a more accurate and useful picture of the oil and
gas reserves that a company holds. The new reporting standards become effective January 1, 2010. The rule proposal reflects
the significant changes that have taken place in the oil and gas industry since the adoption of the original reporting
requirements more than 25 years ago. The proposed rule changes incorporate improved technologies and alternative
extraction methods, and enable oil and gas companies to provide investors with additional information about their reserves.
The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace, the less
that the marketplace is forced to rely solely upon information provided by speculators.
The enhanced reporting standards will add a broader aspect of valuation with respect to reserves on a standardized basis.
Some the key changes include:
Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.
Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves.
Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves.
Requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria.
Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.
Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month period-rather than year-end prices, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.
In addition to the SEC working paper there are several very good opinion papers on the proposed reserve reporting standards.
Production Group Comparison of EV to EBITDA
Assessing the EV/EBITDA in smaller parts shows unique characteristics based on production size. Historically, Junior producers
have had valuations roughly twice that of the largest producers, and this relationship held through the market upswing,
downswing and now in the current more stable period:
Table 2: Enterprise Value to EBITDA: Trend by Production Group
Production Group 2002 – 2007
Average
Q2 ’08 (Peak) Q1 ’09 (Low) Q3 ’09 (Current)
Junior 12.1 14.3 5.2 9.5
Intermediate 8.1 11.5 3.8 9.1
Senior 6.1 10.1 3.8 9.4
Super Independent 5.8 7.7 3.4 7.2
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© 2009 Marcus Wolters. All Rights Reserved
$0
$40,000
$80,000
$120,000
$160,000
20
02
20
03
20
04
20
05
20
06
20
07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector
Market Cap per BOE Daily Production$US per Daily BOE
Market Capitalization to Production
U.S. E&P Sector Overview
It took only nine months (July 2008 – March 2009) for the average
Market Cap per BOEQ to slip to levels not seen since 2003. The metric
has started to recover mid-2009, but perhaps for the wrong reasons:
is the WTI outlook propping up E&P valuations? If so, then there
might well be a correction come Q1 earnings season should gas prices
remain stagnant - the more important price marker for the E&P sector
is always natural gas. It was argued previously that the WTI/Henry
Hub relationship is has weakened in this era, so it is harder to explain
the increase in the multiple when natural gas prices are far less
robust.
Operating costs and production taxes are lower in 2009 than in 2008,
which increase EPS, and this in turn helps explain some of the increase
in share price and market cap. Along with the collapse in commodity
prices came a related drop in costs – drilling, chemicals, wireline,
seismic etc.
Another factor that explains the increase in value is the renewed
appetite and ability to add debt. Much of the E&D exploration activity
in 2009 was done on a cash flow basis only and this appear to be
easing up. The outlook for growth is enhanced as appropriate
leveraging can be put into E&D activities again.
Market Cap and Production Size
The relationship between production size and market capitalization holds under this metric as well, but the share prices of
Junior producers was hit much harder between the peak of ’08 and the floor of ’09, depressing the values much more than
larger producers. The breadth of valuation in this current period shows, at least on the surface, much less distinction between
the production groups.
Table 3: Market Capitalization per Daily BOE Production: Trend by Production Group ($US per BOE)
Production Group
2002 – 2007
Average Q2 ’08 (Peak) Q1 ’09 (Low) Q3 ’09 (Current)
Junior $74,000 $145,500 $28,000 $54,000
Intermediate 63,700 118,700 31,400 56,530
Senior 39,850 96,300 31,250 52,450
Super Independent 41,670 87,900 33,400 48,920
12.30 12.80 12.90 13.30 14.00 15.40 15.90 15.60
11.60 11.10 11.80
Q1
'07
Q2
'07
Q3
'07
Q4
'07
Q1
'08
Q2
'08
Q3
'08
Q4
'08
Q1
'09
Q2
'09
Q3
'09
U.S. E&P Sector Operating Cost per BOE Trend, E&P Sector
($US per BOE)
Lease Operating + Production and Ad Valorem Taxes
Page 9
© 2009 Marcus Wolters. All Rights Reserved
Why Fundamentals Matter
What are the Objectives of Fundamentals Analysis?
The objective is to develop a range of expectations, establish norms and identify qualities/deficiencies from each E&P firm
that will:
Either insulate from or expose the firm to market downturns, or
Provide for or take away from the ability to take advantage of opportunities in market upswings, and
Establish a framework of the U.S. E&P landscape to do deeper company specific analysis.
In and by itself, this level of analysis is not sufficient to make a particular “call” on a single E&P. Fundamentals provide the
strong backbone to do comparative assessments and gauge trends in the E&P sector: It sets the framework.
Mitigate the Price Effect and Focus on the Drivers
Gauging E&P performance is especially challenging when oil & gas prices are strong. Lots of companies look good when
revenues are strong and that is when analysis slants towards an optimistic view based more on price outlooks and less on
fundamentals. But when commodity prices fall, it is valuable to see which of the E&P firms held up and were in a better
position to take advantage of an upswing in prices.
The reality is that oil & gas prices are highly cyclical, have been for many years, and analysis has to be addressed with this idea
in mind. It must be emphasized the E&P sector and its firms are rather at the mercy of the market when it comes to oil & gas
prices – factors that are driven more by economic and geo-political events and largely out of the firm’s control. And most short-
term and long-term decisions E&P firms make will take a commodity price view into consideration. But wouldn’t it make sense
to assess the E&P sector and its companies less on terms of prices and more on the workings of the firm?
What was needed were methods and analysis that stripped out the revenue factor and examined the underlying drivers that
dictate how E&P firms react to price environments. The P5 Index and its counterpart the L5 Index was developed using
selected key drivers based on the principle that assessing the parts of a company’s operations – reserves management,
operations and capital management – together can provide strong indicators of total performanceiv
.
Identify the Key Drivers
The first step was to identify key metrics that would capture a broad range of E&P business. Each of the six metrics listed below
brings in a unique financial and operational aspect of the firm:
Table 4: Key Performance Drivers
Key Metric The metric reflects:
3 Year Reserve Replacement Cost
($US per BOE)
Reserve management performance. The three-year measure is used as it
captures the reserve development life-cycle better than a one-year
measure.
Lease Operating Expenses – 1 Year
($US per BOE)
Oil & Gas production efficiency.
Long-term Debt to Proven Reserves ($US per BOE)
The prudent use of debt to build reserves.
SEC PV10 Value to Total Debt The future value of reserves compared against the current debt levels.
BOE Production Growth – 1 Year The effectiveness of the firm to increase production levels.
Production Replacement – 1 Year The effectiveness of the firm to grow reserves in tandem with
producing them.
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© 2009 Marcus Wolters. All Rights Reserved
Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals
Taking the tops and bottoms and then comparing them gives us the range of quality that we can assess for the whole E&P
sector. The table below shows the differences between the five “best” E&P firms and the five “poorest”:
Table 5: Comparing Performance Metrics (YE 2008 Results)
Key Metric Strong Fundamentals (P5) Poor Fundamentals (L5)
3 Year Reserve Replacement Cost $12.55 $42.19
Lease Operating Expenses – 1 Year $7.47 $14.59
Long-term Debt to Proven Reserves (Times) 1.74x 8.72x
SEC PV10 Value to Total Debt 5.36x 1.17x
BOE Production Growth – 1 Year 32% -13%
Production Replacement – 1 Year 398% 150%
Translation into Other Metrics
To illustrate how the key input driver results translate into other metrics, selected key ratios are tabled belowv. Operations
metrics are calculated on the quarterly average between Q1 ’07 and Q3 ’09. Debt Related metrics are calculated as at Q3 ’09.
Returns and margins are the annual average of year end 2006-2008.
Table 6: Other Metrics and Performance Drivers
Functional Area Metric Strong Fundamentals (P5) Poor Fundamentals (L5)
Operations ($US per BOE)
Lease Operating & Taxes $6.20 $13.00
General & Admin 3.10 3.40
Interest & Pref Dividends 1.50 4.30
Recycle Ratio 3.32x 1.13x
Debt Related
Debt to Capitalization 30% 60%
Debt to EBITDA (TTM) 0.90x 1.70x
EBITDA Interest Coverage 35.4x 14.7x
Returns & Margins
EBITDA Margin 66% 71%
Profit Margin 29% -5%
Return on Equity 19% -9%
Return on Capital Employed 15% -5%
Return on Assets 10% -3%
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© 2009 Marcus Wolters. All Rights Reserved
How Fundamental E&P Drivers Translate into Market Valuations
The translation from corporate and operating performance into market valuation is a fairly intuitive exercise: strong underlying
health will translate into stronger valuation. But the ability to identify and assess individual E&P’s across the whole sector
(+100 publicly traded, many more private) presented a whole different challenge.
Market Cap versus Daily Production: Not a single U.S. E&P was left
unaffected when crude prices collapsed in mid-2008. Regardless of
performance ranking, market values fell by the same magnitude
across the board.
The E&P sector bottomed in the first quarter of 2009. Based on the
sample of 84 U.S.-based E&P’s, the average Market Cap per Daily BOE
was $34,000 in Q1 ‘09. Corresponding with increasing crude prices,
the metric increased to $66,000 per BOEQ by the third quarter, which
could be used as the starting point for these valuations moving into
2010. The value will be slightly higher for Q4 2009 as share price
continue to recover.
At Q3 ’09, companies with strong performance metrics averaged just
over $90,000 per BOEQ. E&P’s with the poorest performance metrics
averaged $29,600 per BOEQ.
Enterprise Value to EBITDA: Very similar behaviors are seen when
assessing EV against cash earnings (EBITDA). On a trailing twelve
month basis (TTM) the total E&P sector averaged 12.5 EV to EBITDA at
Q2 ’08 (commodity price peak) and fell to 4.4 by Q1 ’09. Setting the
framework for2010, the U.S. E&P sector will exit 2009 at roughly 10x
EV to EBITDA.
E&P’s with strong performance metrics peaked at 19.2x and at Q3 ’09,
EV to EBITDA averaged 13.1x. The value exit-2009 will be slightly
higher as share prices continue to increase.
At the peak of the cycle, EV to EBITDA for the E&P’s with weaker
fundamentals was 4.0x and recovered to 5.4x by Q3 2009.
Price to CFPS (Trailing Twelve Months): Especially over in the past
eighteen months, looking at Price to Cash Flow instead of Price to
Earnings has been more effective at establishing a 2010 perspective.
Corresponding with the other two metrics, the trend has been very
similar, but with a twist: with the anticipation of sustained high
commodity prices in mid-2008, there was less distinction between
fundamentally stronger E&P’s than fundamentally weaker ones from
at that point in time. But when commodity prices collapsed through
the end of 2008, value collapse with a far greater magnitude than
what really should have - that is, were share prices valued correctly in
the first place at Q2 ’08.
$0
$50,000
$100,000
$150,000
$200,000
Strong Fundamentals Weak Fundamentals
U.S. E&P SectorPerformance Group Comparison
Market Cap per BOEQ - 2007 through 2009
Q1 '07 Q3 '09
0.0
5.0
10.0
15.0
20.0
25.0
Strong Fundamentals Weak Fundamentals
Q1 '08
Q2 '08
Q3 '08
Q4 '08
Q1 '09
Q2 '09
Q3 '09
U.S. E&P SectorPerformance Group Comparison
Enterprise Value to EBITDA - 2008 and 2009
0.0
2.0
4.0
6.0
8.0
Strong Fundamentals Weak Fundamentals
Q1 '08
Q2 '08
Q3 '08
Q4 '08
Q1 '09
Q2 '09
Q3 '09
U.S. E&P SectorPerformance Group Comparison
Price to Cash Flow per Share - 2008 and 2009
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© 2009 Marcus Wolters. All Rights Reserved
Two Scenarios for 2010
Assessing the Value of Market Cap to Production
The sensible objective of sensitivity analysis is to provide the user with perspectives of possible outcomes without over-
specifying the inputs, and at the same time choosing metrics that capture a broad range of ideas. Sensitivities were done on
Market Capitalization using relationships between Cash Flow per Share, revenue/expense drivers and the average price
received for crude oil and natural gas. The result for each E&P was then tied back to daily production to calculate the metric.
The sensitivities were assessed using production groups as the back drop.
Four key factors were considered:
1. The variables that drive the sensitivity must be highly relevant to the problem. This sounds intuitive, but sometimes
the choice of variable misses the business case. For these tests, three variables were used: oil price, natural gas price
and lease operating costs.
2. The range for each variable should be within a “possible outcome” for the time frame considered.
3. The starting data must reflect the most recent results. In these three cases, Q3 ’09 results are the starting point.
4. The results could be assessed from different viewpoints – for this paper, Production Groups were examined.
2010 Prices Rise, Cost Pressures
Changes: Oil Prices increased by 50%, natural gas prices increase
50%, operating expenses increase 20%
Result: Market Cap per BOEQ rises ~60% on average. Growth in
smaller producers is stronger than larger producers.
This is not unrealistic. Based on the sample, on average, the price
received for natural gas in Q3 was $4.34 per Mcf and the average
price for crude oil was $63.74 per Barrel. A 50% increase over the
year would result in natural gas at $6.50 and crude oil at $95.50.
This could be a situation that would reflect the U.S. economy
regaining momentum and increasing demand for energy: air travel on
the increase, miles driven increasing –overall demand for refined
products increasing. Natural gas prices would increase at the same
rate with normal seasonality, keeping the WTI/Henry Hub ratio steady.
2010 Prices Weaken, Costs Ease
Changes: Oil Prices decrease by 20%, natural gas prices decrease
20%, operating expenses decrease 5%
Result: Market Cap per BOEQ decreases ~27% on average. Impact on
smaller producers is stronger than larger producers.
Reflects possible “double dip” fall in commodity prices. Costs would
ease primarily as sliding scale production taxes would decrease. This
scenario would capture a lower bound of valuations based on price
and cost sensitivities.
A 20% drop in crude prices would roughly equate to $51.00 per barrel
for the year. A 20% drop in natural gas prices would equate to roughly
$3.50 per Mcf.
76,500
54,100 50,000
44,800
54,300
39,100 37,000 34,900
Junior Intermediate Senior Super Independent
Base Case
Scenario
U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE
2010 Price Collapse, Operating Costs Ease
$USD per Daily BOE Production
76,500
54,100 50,000
44,800
104,000
76,200 69,200
59,500
Junior Intermediate Senior Super Independent
Base Case
Scenario
U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE
2010 Price Spike, Moderate Cost Pressures
$USD per Daily BOE Production
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© 2009 Marcus Wolters. All Rights Reserved
2010 Valuation Range Possibilities - Production Groupings.
The table below details the ranges of three metrics based on the two scenarios, arranged by production groups. EV to EBITDA is approximated based on an historical relationship between the two ratios. See endnote ii for a table of production ranges for each group. Metrics for Q3 2009 are calculated on actual results.
Table 7: Market Cap to Daily BOE Production: 2010 Outlook by Production Group
Production Group Q3 2009 (Actual) 2010 High Price Case 2010 Low Price Case
Junior $54,000 per BOEQ $104,000 per BOEQ $54,300 per BOEQ
Intermediate 56,530 76,200 39,100
Senior 52,450 69,200 37,000
Super Independent 48,920 59,500 34,900
Table 8: Enterprise Value to EBITDA: 2010 Outlook by Production Group
Production Group Q3 2009 (Actual) 2010 High Price Case 2010 Low Price Case
Junior 9.5x 11.3x 8.2x
Intermediate 9.1 8.8 5.4
Senior 9.4 8.2 5.2
Super Independent 7.2 7.3 5.0
Table 9: Average Market Capitalization ($USD) Outlook by Production Group
Production Group Q3 2009 (Actual) 2010 High Price Case 2010 Low Price Case
Junior $258 Million $370 $167
Intermediate $2.4 Billion 3.2 1.6
Senior $6.5 Billion 8.6 4.6
Super Independent $25.1 Billion 30.6 17.9
Final Comments
The U.S. E&P sector has clearly come off its early 2009 lows and the outlook for 2010 appears to be more robust. But several
questions will remain on the table which will affect valuations. For example:
Will the continental gas oversupply subside? In the short term, the main factor will be weather related and if North
America will experience a colder than normal temperatures in winter and/or the summer season will be warmer.
How will new government/environmental policies translate into reduced energy consumption? This is a longer-term
consideration, but valuations will be effected nonetheless.
Will the credit markets continue to ease?
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© 2009 Marcus Wolters. All Rights Reserved
Data Management
Define sources
CollectionVerification
and validation
MetricsFinancial measures
Operational measures
Trend calculations
Define the Characteristics
of the Firm
Producer Group
Commodity Focus
Growth Mode
Performance Measurement
Reserve management
Operating efficiency
Capital structure
Data Conversion
Convert to functional
forms
ReportingMarket
MeasuresCredit
BenchmarksPeer Analysis
Data Summary
Data Collection and Management
Aggregating & developing the proper information for the U.S. Independent industry requires, first and foremost, a strong
understanding of what factors comprise the sector – the companies, the resource landscape and cost considerations, and oil &
gas economics.
The methodologies developed for this analysis can be loosely
described in six steps as shown in the figure to the right. Each
phase has its own set of objectives and one “process” leads into
the other. For instance, calculating key metrics would be
impossible without effective data management; failure in
designing a proper data structure would make research
cumbersome, time-consuming and ultimately ineffective. So
there is no single analytical function in this process that
outweighs another in terms of importance. The challenge is to
be able to design analysis with an industry-wide perspective and
at the same time maintaining the unique characteristics of each
company. There are over 100 publicly traded U.S. E&P
companies with a meaningful market capitalization – daily
production ranges from less than 100 BOE to over 600,000 BOE.
Each company has a unique capital structure, a unique
production profile (oil versus gas) and every single E&P is active
in different degrees in producing regions and formations.
The primary goal in building this information backbone is not simply to be able to construct a data system that compares any
company to any other company (there are scores of free internet services that do just that), but rather to be able to position a
company or sub-group within the U.S. E&P sector in a proper perspective.
The system used to gather, calculate and stratify the data from the various was developed using a combination of Microsoft
Access, Microsoft Excel and Visual Basic 6.0. Data has been compiled and processed for U.S. based E&P firms annually since
2002, and quarterly information has been processed since Q1 2007.
Effective analysis is impossible without a foundation of reliable information, and this requires a rigorous approach to
identifying, arranging and processing data. Data was collected and validated in groups with respect to how the data fits
categorically. It is essential that the data collection system is efficient as the data and information is the backbone to our
research. In terms of data sources and requirements, the table below shows where the data is sourced from and how the data
is categorized:
Category Data Requirement Sources
Reserves Reserve Reconciliations, Daily Production, PV10
Values, BOE & McfE conversions
SEC 10-k, SEC 10ksb, SEC 10-Q
Operations Drilling, Land Positions, Operating Oil & Gas Wells,
Employees
SEC 10-k, SEC 10ksb, SEC 10-Q
Financial Balance Sheet, Income Statement, Statement of
Cash Flows, Oil & Gas Capital Expenditures, Debt
Maturities, Shares Outstanding
SEC 10-k, SEC 10ksb, SEC 10-Q
Other Share Prices, Company Activity, Industry Activity Company websites, newswires, The EIA, E&P
associations.
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© 2009 Marcus Wolters. All Rights Reserved
Companies Surveyed
Drawing from a sample of just over 95 publicly traded U.S. based E&P companies the final analysis was based on 84 firms. The
main factors that reduced the sample to 84 firms were data quality issues: very small E&P firms with small market
capitalizations or firms that had listing requirement issues were taken out of the sample:
Junior Producers Intermediate Producers
Abraxas Petroleum Corp. (AXAS) Atlas Energy Resources, LLC (ATN) Adams Resources & Energy, Inc. (AE) ATP Oil & Gas Corporation (ATPG)
American Oil & Gas Inc. (AEZ) Berry Petroleum Company (BRY)
Approach Resources Inc. (AREX) Bill Barrett Corporation (BBG)
Arena Resources, Inc. (ARD) BreitBurn Energy Partners L.P. (BBEP) Brigham Exploration Co. (BEXP) Cabot Oil & Gas Corporation (COG)
Callon Petroleum Company (CPE) Clayton Williams Energy (CWEI)
Cano Petroleum, Inc. (CFW) CNX Gas Corporation (CXG)
Carrizo Oil & Gas (CRZO) Comstock Resources (CRK) Contango Oil & Gas Company (MCF) Concho Resources Inc. (CXO)
Delta Petroleum (DPTR) Continental Resources, Inc. (CLR)
Double Eagle Petroleum Co. (DBLE) Denbury Resources Inc. (DNR)
Dune Energy, Inc. (DNE) Encore Acquisition Co. (EAC) Edge Petroleum Corp. (EPEX) Energy XXI (Bermuda) Limited (EXXI)
EV Energy Partners, L.P. (EVEP) Exco Resources (XCO)
Evolution Petroleum Corporation (EPM) Linn Energy, LLC (LINE)
Fieldpoint Petroleum Corporation (FPP) Mariner Energy, Inc. (ME) Gasco Energy, Inc. (GSX) McMoRan Exploration Co. (MMR)
Gastar Exploration Limited (USA) (GST) Penn Virginia Corporation (PVA)
GeoMet, Inc. (GMET) Petrohawk Energy Corporation (HK)
GeoResources, Inc. (GEOI) Petroleum Development Corporation (PETD) GMX Resources Inc. (GMXR) PetroQuest Energy (PQ)
Goodrich Petroleum Corp. (GDP) Quicksilver Resources Inc (KWK)
Gulfport Energy Corp. (GPOR) Range Resources Corp. (RRC)
Kodiak Oil & Gas Corp. (KOG) Rosetta Resources Inc. (ROSE) Legacy Reserves LP (LGCY) SandRidge Energy Inc. (SD)
Magnum Hunter Resources Corporation (MHR) St. Mary Land & Exploration Co. (SM)
Meridian Resource Corp. (TMR) Stone Energy Corporation (SGY)
NGAS Resources, Inc. (NGAS) Swift Energy Company (SFY) Parallel Petroleum Corporation (PLLL) Ultra Petroleum Corp. (UPL)
PrimeEnergy Corporation (PNRG) Unit Corporation (UNT)
RAM Energy Resources, Inc. (RAME) Venoco, Inc. (VQ)
Rex Energy Corporation (REXX) W&T Offshore, Inc. (WTI) Royale Energy, Inc. (ROYL) Whiting Petroleum Corporation (WLL)
TXCO Resources Inc. (TXCO)
Vanguard Natural Resources, LLC (VNR)
Warren Resources (WRES)
Senior Producers Super Independent Producers
Cimarex Energy Co. (XEC) Anadarko Petroleum Corporation (APC)
Forest Oil Corporation (FST) Apache Corporation (APA) Newfield Exploration Co. (NFX) Chesapeake Energy Corporation (CHK)
Noble Energy (NBL) Devon Energy Corporation (DVN)
Pioneer Natural Resources (PXD) EOG Resources (EOG)
Plains Exploration & Production Company (PXP) XTO Energy Inc. (XTO) Southwestern Energy Company (SWN)
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© 2009 Marcus Wolters. All Rights Reserved
Financial and Production Summary, Q1 ’07 – Q3 ‘09
Financial Recap
Based on the sample of 84 companies:
Cumulative operating and net income was wiped out in two quarters, Q4 ’08 and Q1 ‘09
Asset impairment charges exceeded $40 Billion at year-end 2008 and continued through the first quarter 2009.
$US Millions 2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Total Revenues 18,254 22,165 21,867 27,587 24,895 25,825 45,294 22,642 18,466 17,997 20,328 Total Expenses 12,648 13,514 13,828 15,112 16,325 18,496 20,430 53,110 49,163 16,207 15,571 Operating Inc 5,606 8,651 8,039 12,476 8,570 7,328 24,864 -30,468 -30,697 1,790 4,756 Depreciation 5,259 6,558 6,031 5,293 6,484 6,743 9,317 54,914 40,360 6,717 6,336 EBITDA 10,865 15,210 14,070 17,769 15,046 14,072 34,181 24,442 9,663 8,507 11,092 Interest Exp 1,156 1,214 1,227 1,525 1,247 1,077 1,210 1,397 1,190 1,325 1,301 Net Income 2,568 4,797 4,117 7,519 3,786 813 19,125 -22,838 -20,732 -237 2,532 Total Assets 115,268 125,421 132,253 141,783 144,785 143,973 179,655 161,053 143,979 145,954 150,430 Total Equity 273,619 289,194 302,745 322,928 338,450 364,401 390,304 360,741 328,072 328,820 330,064 Total Debt 79,060 82,045 86,448 85,613 88,161 89,671 97,882 104,737 101,178 104,251 98,505
Production and Average Price Recap
Crude Oil & NGL’s expressed in $US per Bbl. NGL volumes converted at 1.5x
Natural Gas expressed in $US per Mcf
BOE values converted at 1 Bbl = 6 Mcf, McfE values converted at 6 Bbl = 1 Mcf
Average Price Received
2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Crude & NGL's 52.54 59.13 67.20 76.50 85.37 101.81 101.02 71.17 43.06 56.23 63.74 Natural Gas 6.75 6.88 6.24 7.18 8.06 9.74 9.18 7.10 5.16 4.56 4.34 $US per BOE 46.44 49.08 49.21 59.41 62.37 74.39 71.97 56.85 36.08 39.17 40.78 $US per McfE 7.74 8.18 8.20 9.90 10.40 12.40 11.99 9.48 6.01 6.53 6.80
Average Daily Gas Production by Production Group (MMcf per Day)
2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Junior 13.0 14.6 15.6 16.5 16.8 18.4 17.6 18.5 19.5 18.8 18.7 Intermediate 110.4 122.0 126.2 133.8 140.0 145.1 143.4 151.0 158.7 157.9 156.2 Senior 323.0 357.6 387.0 404.0 416.7 429.7 445.1 460.7 476.5 475.0 468.8 Super Ind. 1,723.1 1,728.0 1,773.9 1,853.5 1,913.8 1,908.9 1,963.0 2,032.6 2,103.7 2,166.7 2,138.7
Average Daily crude Oil & NGL Production by Production Group (‘000 Barrels per Day)
2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Junior 1.1 1.2 1.3 1.4 1.6 1.7 1.6 1.7 1.8 1.9 1.7 Intermediate 9.6 10.6 10.8 11.2 11.5 12.1 11.4 11.8 12.1 12.5 12.1 Senior 35.1 36.0 36.4 38.8 40.8 40.9 40.4 39.8 39.2 39.8 40.2 Super Ind. 154.1 160.6 153.9 155.9 156.3 145.9 145.8 154.2 162.8 175.7 165.5
Page 17
© 2009 Marcus Wolters. All Rights Reserved
Brief Glossary
The contents and expressions used in this report are written at a fairly advanced level. In order to avoid possible confusion,
tabled below is a list of some terms that have been used by themselves and used interchangeably throughout the report:
BOE: Barrel of Oil Equivalency: 1 Barrel = 6 Mcf Natural Gas
BOEQ: Daily Oil & Gas Production in Barrel of Oil Equivalent (BOE) Terms
McfE: Mcf Natural Gas Equivalency: 1 Barrel Oil = 1/6th
Mcf Natural Gas
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization
Market Capitalization, Market Cap or MC: Share Price x # Shares Outstanding
Enterprise Value or EV: Market Capitalization + Total Long-term Debt – Cash & Cash Equivalents
3 Year Reserve Replacement Cost: ∑ Oil & Gas Capital Expenditures Most Recent 3 Years l
∑ Extensions, Discoveries, Acquisitions and Improved Recoveries, 3 Years
Note: Reserve Replacement Costs are also calculated with Revisions – but due to the high fluctuation in Revisions
reporting over the past few years, it was felt the RRC without revision was the appropriate metric to use.
Operating Netback ($US per BOE): Average Price Received – Lease Operating Expenses – Production, Ad Valorem Taxes
Recycle Ratio: m Operating Netback m
3 Year Reserve Replacement Cost
Page 18
© 2009 Marcus Wolters. All Rights Reserved
Author’s Bio
Marcus Wolters
Over fifteen years of oil & gas and energy analysis experience:
o Summer Intern Positions:
1991: Amoco Canada Production Company
1992: Research Assistant, University of Calgary, Department of International Finance
1993: Crestar Energy Inc.
o Career Positions:
Ziff Energy Group (1994-1997)
Royal Bank of Canada, Global Energy Group (1997 – 2001)
Enbridge Pipelines Inc. (2001-present)
o Current position: Senior Advisor, Commodities Forecasting Group, Enbridge Pipelines Inc.
Areas of specialization:
o Oil & Gas fundamentals
o Credit risk assessment
o Production analysis and forecasting
o Statistical analysis and corporate benchmarking
o Economic modeling
o Database design
Education:
o University of Calgary, Finance (1988-1992)
o University of Western Ontario, Statistics (1992-1993)
Contact Information:
o Email: [email protected]
o LinkedIn Profile: http://ca.linkedin.com/in/marcwolters
Page 19
© 2009 Marcus Wolters. All Rights Reserved
Notes
i The U.S. universe comprises 84 publicly traded American based E&P’s. For the full detailed list, please see the section “Companies Surveyed.” Throughout the report, outliers and extreme values were removed from the analysis where it was deemed appropriate. Unless otherwise stated, all analysis was developed in-house. All data was obtained from its original source: the United States Securities and Exchange Commission (www.sec.gov). Share prices obtained from Yahoo! Finance. Presentations, news releases, outlooks and other relevant operational information obtained from company websites. Institutional ownership data obtained from Thomson-Reuters. ii The sample of 84 U.S. E&P firms was divided into four production sub-groups: Junior, Intermediate, Senior and Super
Independent. This widely accepted approach is very useful in examining many aspects of the E&P sector, from financial analysis to operations. The production sizes are tabled below:
Production Group Range of Daily Production
Junior 0 - 15,000 BOE Intermediate 15,000 - 75,000 BOE Senior 75,000 – 250,000 BOE Super Independent Greater than 250,000 BOE
iii The “Oil 10” and “Gas 10” E&P companies were determined by ranking the universe of 84 publicly traded E&P companies on
the basis of oil production and gas production, not revenue weighted and indifferent to the size of the firm or any performance considerations: Oil Focus Companies % Oil Gas Focus Companies % Gas
Arena Resources, Inc. ARD 83% Atlas Energy Resources, LLC ATN 97%
Continental Resources, Inc. CLR 74% Cabot Oil & Gas Corporation COG 95%
Evolution Petroleum Corporation EPM 55% CNX Gas Corporation CXG 100%
Fieldpoint Petroleum Corporation FPP 65% Double Eagle Petroleum Co. DBLE 98%
Gulfport Energy Corp. GPOR 93% Gastar Exploration Limited (USA) GST 100%
Legacy Reserves LP LGCY 73% GeoMet, Inc. GMET 100%
Magnum Hunter Resources Corporation MHR 74% Goodrich Petroleum Corp. GDP 97%
Rex Energy Corporation REXX 73% PrimeEnergy Corporation PNRG 65%
TXCO Resources Inc. TXCO 65% Southwestern Energy Company SWN 100%
Whiting Petroleum Corporation WLL 77% Ultra Petroleum Corp. UPL 96%
iv
Performance measurement: Junior producers are not included in these types of performance assessments. The 2008 “P5” and “L5” E&P firms are tabled below:
P5 – Strong Fundamentals Group L5 – Weak Fundamentals Group
CNX Gas Corporation CXG ATP Oil & Gas Corporation ATPG
EOG Resources EOG Clayton Williams Energy CWEI
Range Resources Corp. RRC Stone Energy Corporation SGY
Southwestern Energy Company SWN Swift Energy Company SFY
Ultra Petroleum Corp. UPL W&T Offshore, Inc. WTI
v Key industry measures are assessed from first principles through to valuation measures: Input Metrics look at the drivers of
what defines the E&P sector: the efficient management of oil & gas resources and the efficient exploitation of reserves. Corporate Metrics provide guidance as to how the sector (as well as the individual company) manages its capital, asset and manpower requirements to give working strength to the reserve base. Output Metrics provide the tools which place a value on the individual company and the sector - trend analysis becomes an essential component in market valuations, returns and margins.