Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Oil&GasValuation:ComparablePublicCompanies&PrecedentTransactions

Pickingasetofcomparablecompaniesorprecedenttransactionsforanoil&gascompanyisverysimilarto
howyouwouldpickthemforanyothercompanyherearethedifferences:

1. RatherthancuttingthesetbyrevenueorEBITDA,youwouldinsteadselectthesetbasedonProved
ReservesorDailyProduction(inadditiontothenormalgeographicandindustrycriteria).
2. InsteadoftraditionalmetricslikerevenueorEPS,youlistthemetricsandmultiplesthatarerelevantto
anenergycompany:EBITDAX,ProvedReserves,DailyProduction,theOilMix%,andsoon.

PleaseseetheprevioushandoutinthiscourseonOil&GasKeyMetricstoseethefulllistandtolearnhowto
calculatethesemetricsandmultiples.

ComparableCompaniesNorthAmericanOil&GasE&PCompanieswithOver10TcfeProvedReserves
($inMillionsExceptPerShare,Reserve,andProductionData)
OperatingStatistics

Capitalization
Equity
(1)

Proved

Daily

Reserves

Production

TTM
12/31/2010 12/31/2011
$4,509 $4,571 $4,949
5,743 8,099 9,908
8,447 12,659 16,428
5,989 8,264 9,694
4,797 6,364 5,613
1,761 4,375 5,507

(Bcfe)
14,254.0
13,824.0
19,350.0
14,199.5
16,398.0
10,776.1

(MMcfe)
2,480.8
3,624.0
3,870.0
3,499.7
3,830.1
2,118.0

(3)

Enterprise
(1)(2)

EBITDAX

CompanyName
ChesapeakeEnergyCorporation
AnadarkoPetroleum
OccidentalPetroleumCorporation
ApacheCorporation
DevonEnergyCorporation
EOGResources,Inc.

Value
Value
$15,489 $29,710
28,937 40,880
61,989 64,381
32,252 37,384
28,999 37,353
22,289 24,882

Maximum
75thPercentile
Median
25thPercentile
Minimum

$61,989
31,439
$28,968
23,951
15,489

$64,381 $8,447 $12,659 $16,428

19,350.0
15,862.0
14,226.8
13,917.9
10,776.1

3,870.0
3,778.6
3,561.9
2,735.5
2,118.0

XTOEnergyInc.

$24,542

$34,686

14,827.3

2,863.6

ValuationStatistics

Capitalization
Equity
(1)

$7,150

$7,416

EnterpriseValue/

Developed

R/P
Oil

Ratio
(4)

Areas
/Proved Mix%
USDiversified
58.4%
7.8%
International;USFocused
70.5%
30.9%
International
77.3%
76.2%
International
69.1%
47.8%
US&Canada
70.3%
18.0%
US,Canada&Trinidad
54.4%
15.6%

USDiversified

(Years)
15.7
10.5
13.7
11.1
11.7
13.9

77.3%
70.4%
69.7%
61.1%
54.4%

76.2%
43.6%
24.5%
16.2%
7.8%

15.7
13.9
12.7
11.3
10.5

60.7%

13.9% 14.2

EnterpriseValue/

(3)

Enterprise
(1)(2)

$6,818

Proved
Production

EBITDAX

Proved

Daily

CompanyName
ChesapeakeEnergyCorporation
AnadarkoPetroleum
OccidentalPetroleumCorporation
ApacheCorporation
DevonEnergyCorporation
EOGResources,Inc.

Value
Value
$15,489 $29,710
28,937 40,880
61,989 64,381
32,252 37,384
28,999 37,353
22,289 24,882

TTM
12/31/2010 12/31/2011 Reserves Production
6.6x
6.5x
6.0x $2.08 $11.98
7.1x
5.0x
4.1x 2.96 11.28
7.6x
5.1x
3.9x 3.33 16.64
6.2x
4.5x
3.9x 2.63 10.68
7.8x
5.9x
6.7x 2.28 9.75
14.1x
5.7x
4.5x 2.31 11.75

Maximum
75thPercentile
Median
25thPercentile
Minimum

$61,989
31,439
$28,968
23,951
15,489

$64,381
40,006
$37,368
31,620
24,882

14.1x
7.7x
7.4x
6.7x
6.2x

6.5x
5.8x
5.4x
5.1x
4.5x

6.7x
5.6x
4.3x
4.0x
3.9x

XTOEnergyInc.

$24,542

$34,686

4.9x

5.1x

4.7x $2.34 $12.11

$3.33 $16.64
2.88 11.92
$2.47 $11.51
2.29 10.83
2.08 9.75

(1)Valuationasof12/11/2009.
(2)EnterpriseValuedefinedasEquityValuelessCash&CashEquivalents,lessNetValueofDerivatives,lessInvestmentsinEquityCompanies,plusTotalDebt,plusAssetRetirement
Obligation,plusCapitalLeases,plusUnfundedPensionObligations,plusPreferredStock,plusNoncontrollingInterests.
(3)EBITDAXdefinedasOperatingIncomeplusDD&A,plusAssetRetirementAccretion,plusStockBasedCompensation,plusNonCashDerivativeLosses,plusImpairmentCharges,plus
OtherOneTimeandRestructuringCharges,plusExplorationExpense.
(4)OilMix%BasedonTTMProductionDataratherthanReserves.

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

PrecedentTransactionsaresimilaraswellusegeography,industry,transactionsize,andpossiblyreserves/
dailyproductiontoselectthedealsandthenusetheoil&gasspecificmetricsandmultiples.

CommonAddBacksandNonRecurringCharges

WhencalculatingEBITDAorEBITDAX,thereareacoupleitemsspecifictooil&gastowatchoutfor:

AssetRetirementAccretion(aformofamortization)
NonCashorUnrealizedDerivative(Gains)/Losses(appearsonthecashflowstatement)
ImpairmentChargesandPP&EWriteDowns(morecommonwithfullcostcompanies)
(Gain)/LossonSaleofAssets(appearsonthecashflowstatement)
EnvironmentalRemediation

YouneedtoreadthefootnotescarefullybecausesometimesthesechargesarealreadyincludedinDD&Aor
arecapitalizedanddonthittheincomestatementatall.

HeresanexampleofchargeswewouldaddbackforChesapeakeEnergy,oneofXTOscomps:

Buttheremaybeadditionalchargeshiddeninthecashflowstatementandinthefootnotessoweneedlook
thereaswell:

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Werenotaddingtheotherchargesonthecashflowstatementeither1)becausetheyrealreadyincludedin
theincomestatementaddbacks(e.g.thelossonthesaleofPP&E),or2)becausetheydonothittheoperating
income(e.g.lossfromequityinvestments)readthefootnotescarefully.

DiscountedCashFlowAnalysis

YoucanstillbuildaDCFmodelforoil&gascompaniesanditsalmost
thesameaswhatyouseefornormalcompanies:

YoustartwithRevenueandmovedowntoEBIT,subtracttaxes,
andthenaddbacknoncashcharges.
Attheendyoustillsubtracttheincreaseoraddthedecreasein
WorkingCapitalandsubtractCapExtogettoUnleveredFCF.
Youstilldiscountthecashflowsinthesameway,applyingamid
yeardiscountifyouwant.
YoustillcalculatetheTerminalValueusingmultiplesorlongtermgrowthrates.
YoustillcalculateWACCjustlikeyouwouldforanormalcompany.

Thekeydifferenceswithanoil&gasDCF:

YouwillhaveadditionalnoncashexpensesinadditiontothestandardoneslikeDD&AandStock
BasedCompensation.
YouwoulduseDailyProduction,EBITDA,orEBITDAXfortheterminalexitmultiplesratherthana
FreeCashFlowbasedmultiple.

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

FortheGordonGrowthmethodusuallyyouassume0%longtermgrowthbecauseoil&gasassetsget
depletedovertimeandtheresonlyafiniteamountintheground.
Youcouldusetheoil&gasindustrystandard10%discountrateratherthancalculatingWACC.
Forthesensitivitytablesyouwouldlookatcommoditypricesasoneofthevariablesratherthan
revenuegrowthorEBITDAmargins;othervariablesmightbethediscountrateandterminalgrowth
ratesorterminalmultiples.

DCFsgenerallydonotworkwellforoil&gascompaniesbecause:

TheyhaveahighCapExrequirement,whichreducesFreeCashFlowandmaycreatedecliningor
negativeFreeCashFlow.
Asaresult,theyareevenmoredependentontheTerminalValuethannormalcompaniessothe
analysisdoesnttellyoumuch.

AnalternativeistheNetAssetValue(NAV)model,whichstreamlinesthetraditionalDCFandmakesitmore
applicabletooil&gascompanies.

NetAssetValue(NAV)Models

ANAVmodelisanalternativetoaDCFthatgivesmoreaccurate
resultsforoil&gascompanies,especiallyforcompanieswithan
upstreamorexploration&productionfocus(i.e.theyfocuson
findingandproducingenergyratherthanonrefiningenergyor
marketingit).

ThemajordifferencescomparedtoatraditionalDCF:

1. ANAVmodelassumesthatthecompanyneverincreases
itsexistingreserves,sothereisnoadditionalCapExin
futureyearsbeyondwhatisrequiredtodevelopexisting
reserves.
2. ADCFmodelisdoneatthecorporatelevel,butyourunaNAVmodelattheassetlevel.Youvaluea
companysassetsseparatelyandthenaddeverythingtogetherattheendwhereaswithaDCFyouare
valuingtheentirecompanyfromthestart.

WithaDCFyouresaying,Thiscompanyoperatesandkeepsearningprofitindefinitelyintothefuturehow
muchisitworthrightnow?butwithaNAVyouresaying,Thiscompanystopsoperatingonceitsreserves
aredepletedhowmuchprofitcanitgeneratebetweennowandthen,assumingnofuturereinvestmentto
findoracquirenewreserves?

HereshowtocreateaNetAssetValuemodel:

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Step1:MakeAssumptionsforReserves,Production,CommodityPrices,FutureCosts,andDiscountRates

Mostofthesewillflowinfromotherpartsofyourmodelorfromthecompanysannualfiling.Intheexample
modelhere,wehaveprojectionsforthefirst5yearsandthenhavetoextrapolatebeyondthatintheNAV.

ProvedReservesasof12/31/2009:
LongTermProductionDecline:
NaturalGas(Bcf):
12,502
NaturalGas:
(5.0%)
NaturalGasLiquids(MBbls):
93
NaturalGasLiquids:
(5.0%)
Oil(MBbls):
294
Oil:
(5.0%)
NaturalGasEquivalents(Bcfe):
14,827

FutureEstimatedDevelopmentCosts:
DevelopmentYears

$8,484
5

DiscountRate:

10.0%

TheProvedReservesnumberscomedirectlyfromthefiling.Futureestimateddevelopmentcostscomefrom
thePV10sectionofthecompanysfiling,andweestimatethatitwilltake5yearstofullydevelopalltheir
existingProvedReserves:

Thediscountrateof10%isthestandardusedintheoil&gasindustryandwhatyoualwaysseeincompanies
filings.

Wehavetheproductionnumbersforthenext5years,butpastthatweneedtomakeourownassumptionsas
thereservesgetdepletedsowearemakingasimpleestimatehereandassuminga5%declineeachyearfor
naturalgas,NGLs,andoil.

ResourcePricesforNAV:
Gas
Oil/NGL Hedged
Forcommodityprices,youassumethesamenumbers
$perMcf $perBbl
Price%
foroilandNGLsanddifferentnumbersfornaturalgas
$7.00 $75.00
110.0%
andthehedgingpercentage;thesenumbersshould
NAV
flowthroughtherestofyourmodelfromtheNAVand PriceCasedUsedinNAV:
willgiveyouaveragedrealizedpricesforthefirst5years.

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Step2:ProjectProductionandRealizedPricesforCommodities

Forthisone,letstakenaturalgasasanexampleandlookatthe
first5yearshere:

2010
2011
2012
2013
2014

Year#
1
2
3
4
5

Beginning
Reserves
(Bcf)
12,502
11,561
10,527
9,385
8,162

NaturalGas
Annual
Production
(Bcf)
941
1,035
1,141
1,223
1,315

Avg.
Price
$/Mcf
$6.84
6.84
6.84
6.84
6.84

Theannualproductionispulleddirectlyfromourproduction
model,andweareassumingroughlya10%productionincrease
inthefirst3yearsfollowedbya78%increaseinyears4and5.
Therealizedpricesarealsocomingfromourexisting
assumptions,flowedallthewaythroughthemodel.

ThebeginningProvedReservesbalancedeclinesbytheannual
productioneachyear.

WeareaddinginaMINformulatomakesurethattheannualproductionneverdropsbelow0.

Intheyearsbeyondthisinitial5yearperiod,you:

Continuetodecreasethereservesbalanceby
theannualproduction.
Straightlinetheaveragerealizedsaleprices,i.e.
assumeaconstant$6.84forallfutureyearshere
basedonourpriceassumptionsabove.
Fortheannualproduction,youtaketheMINof
thebeginningreservesbalanceandtheprevious
yearsproductionmultipliedby(1+LongTerm
ProductionDeclineRate)thatensuresthatproductiondeclinesovertimebutneverdropsbelowthe
reservesfromthebeginningoftheyear.

Revenue($inMillions)

Natural
Total

Gas
Oil&NGL Revenue
$6,438 $2,390 $8,828
Youcarrythoseformulasthroughthenext20or30years(determinetheperiod
7,081 2,629 9,711
basedontheReserveLifeRatio).
7,811 2,844 10,655
8,374 3,049 11,422

9,002 3,277 12,279

7,332 2,669 10,001

6,617 6,617

1,558 1,558

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Step3:MakeExpenseandTaxAssumptionsandCalculateAfterTaxCashFlows

SincetheNetAssetValuemodelisdoneatanassetlevel,youdonotincludecorporateoverheadexpenses
suchasG&A.Foroil&gasyouusuallyjustincludeproductionanddevelopmentexpenses,andassumeatax
ratebasedonthehistoricalnumbers:

Production&DevelopmentExpenses:
Total
Total
Annual Production Production Development
Bcfe
PerMcfe Expenses
Expenses
1,150 $0.95 $1,092 $1,697
1,265 0.95 1,201 1,697
1,391 1.00 1,391 1,697
1,491 1.00 1,491 1,697
1,603 1.00 1,603 1,697
1,522 1.00 1,522
1,446 1.00 1,446
1,374 1.00 1,374
1,305 1.00 1,305
1,086 1.00 1,086
967 1.00 967
228 1.00 228
1.00

CashFlows($inMillions)
PreTax
Cash
CashFlows TaxRate
$6,039
11.8%
6,812
11.8%
7,567
11.8%
8,235
11.8%
8,980
11.8%
10,143
11.8%
9,636
11.8%
9,154
11.8%
8,696
11.8%
6,655
11.8%
5,650
11.8%
1,331
11.8%

11.8%

AfterTax
CashFlows
$5,327
6,009
6,675
7,264
7,921
8,947
8,499
8,075
7,671
5,871
4,984
1,174

Thefirst5yearsofproductionexpensesandtaxratesflowindirectlyfromouroperatingmodel;afterthatwe
assumeconstantexpensesperMcfeandaconstanttaxrate.Fortheannualdevelopmentexpenses,wetakethe
totalfromtheassumptionsatthetopanddividebytheassumeddevelopmentperiod,5yearsinthiscase.

Attheend,wetakerevenueandsubtractproduction,development,andtaxestocalculatetheaftertaxcash
flows.

Step4:TaketheNetPresentValueoftheAfterTaxCashFlows

ThisisjustasimpleNPVformulainExcelapplyittotherangethattheAfterTaxCashFlowscolumncovers:

Youshouldusethestandard10%oil&gasdiscountfortheNAV_Discount_Ratevariablehere.

Step5:ValuetheOtherAssets

Sofar,wehaveincludedonlytheaftertaxcashflowsfromoil&gasexplorationandproductionactivities.

Butnaturalresourcecompaniesfrequentlyhaveotherbusinesssegments:midstream(transportingtheenergy),
refining&marketing(turningitintousablegas/oilandsellingittocustomers),andchemicals.

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

Theyalsohaveundevelopedlandthathasvalueevenifit
doesntcountasProvedReservesorifnothinghasbeen
producedyet.

First,estimatethevaluefortheundevelopedland(seeExcel
pasteinontheright).

Youcangetestimatesfor$/Acreortotalundevelopedland
valuefromequityresearchorfromindustrysourceslikethe
HeroldDatabase.

IfXTOactuallyhadotherbusinesssegments,hereshowwe
mightestimatethevalueofeachone:

OtherBusinessSegments:

UndevelopedAcres(PropertyValuesin$MillionsUSD):
Region:
USTexas:
USOklahoma:
USNewMexico:
USArkansas:
USMontana:
USUtah:
USLouisiana:
USNorthDakota:
USKansas:
USWestVirginia:
USPennsylvania:
USWyoming:
USColorado:
USOther:
USOffshore:
NorthSeaOffshore:
Total:

Acres:
281,000
176,000
21,000
216,000
92,000
84,000
39,000
191,000

58,000
119,000
13,000
2,000
76,000
45,000
133,000
1,546,000

$/Acre:
$1,500
500
300
700
500
400
700
500
500
600
1,200
400
500
300
400
600
$759

Value:
$422
88
6
151
46
34
27
96

35
143
5
1
23
18
80
$1,174

Chemicals
Midstream
Downstream
12/31/2009EBITDA:
$200
12/31/2009EBITDA:
$100
12/31/2009EBITDA:
$150
EV/EBITDAMultiple:
5.0x
EV/EBITDAMultiple:
3.0x
EV/EBITDAMultiple:
3.0x
EstimatedEV:
$1,000
EstimatedEV:
$300
EstimatedEV:
$450

Todothismorerigorously,youwouldselectpubliccompsforeachsegmentandbasetheEBITDAmultipleon
those.

Onceyouhavethevalueoftheundevelopedlandandtheotherbusinesssegments,youaddupallofthose
andthePresentValueofAfterTaxCashFlowsfromProvedReservestogettheEnterpriseValue:

Step6:MakeBalanceSheetAdjustmentsandCalculatetheImpliedPerSharePrice

EnterpriseValue:
$48,444
BalanceSheetAdjustments:
(10,144) OnceyouhavetheEnterpriseValue,youwork
ImpliedEquityValue:
$38,300
backwards(i.e.addcash,subtractdebt,andsoon)toget
toEquityValueandcalculatetheimpliedpershare
DilutedSharesOutstanding:
598.6
pricejustlikeyouwouldforanormalcompany.
ImpliedSharePrice:
$63.99

Exercise
Type:
Number:
Price:
Dilution:
Whenyourefinishedandyouhavethepershareprice,
Options
18.366 $38.39 7.347
youcanthencreatesensitivitytablesbasedon
RSU
5.493
5.493
commoditypricesandtheotherassumptionsatthetop
PerformanceSharesA
0.390 50.00 0.390
PerformanceSharesB
0.228 55.00 0.228
ofthemodel.
PerformanceSharesC
0.245 77.00

PerformanceSharesD
Warrants

0.245 85.00
2.600 20.78 1.756

Oil&GasValuationQuickReference

http://breakingintowallstreet.com

YouwouldnotusemetricslikerevenuegrowthorEBITDAmarginsbecauseonceagain,theyarenot
applicabletooil&gascompanies.

Mining,Footnotes,andMore

YoucanalsocreateNAVmodelsforminingandothernaturalresource
companies.

Theyreverysimilarthemaindifferenceisthatyoumakeadditional
assumptionsontherevenueside(e.g.youmightassumethatonlyacertain
percentageofthetonsminedhavethemetalyourelookingfor,orthata
certainpercentagearewastedintheminingprocess).

YoudonthavetocreateaNAVmodelexactlyliketheexamplewewentthroughaboveherearesome
variationsyouwillsee:

WeusedProvedReserves(1P)herebutyoucanalsouseProved+ProbableReserves(2P)orProved+
Probable+PossibleReserves(3P).Youwillseereferencesto1PNAV,2PNAV,3PNAV,andsoonin
equityresearch.
Youwillseemanyvariationsontheexpenseandtaxassumptionsbecausetheyarecompany
dependent.ThesafestbetistofollowwhattheydointhePV10calculationintheirfilings.
YoucouldvaluetheotherbusinesssegmentsbyusingasegmentlevelDCForothermethodsrather
thanjustassumingasimpleEBITDAmultipleaswedidhere.

Finally,notethatNAVmodelsaremostapplicabletoexploration&productionfocusednaturalresource
companies.

Ifacompanyismorefocusedontransportingenergyorrefiningandsellingit,theyarenotasdependenton
assetsasanE&Pcompanysoyouwouldsticktothestandardpubliccomps,precedenttransactions,andDCF
there.