Kerm,
I'm new to this forum and have been looking around the net (unsuccessfully) for some guidance on valuing oil / gas companies in the exploration stage. It seems like you may know of some Rules-of-thumb that might be useful for the rest of us.
I know how valuation is commonly done for gold companies -- take 1/8 of the indicated reserves in ounces Au, multiply by the price of gold and divide the the number of shares. Thus for gold it is $400US/oz * 0.125 = $50/oz value in-the-ground. I assume there is a similar method used for gas and oil, but since the recovery times may be longer, maybe the constants are different. Let's take a concrete example to work with.
Dynamic Venture (DVL-Alberta) estimates they could have 400bcd of gas recoverable from an 800bcd reserve in their Sarcee well in B.C. (i.e. 50% recovery). After testing, they assume the well will deliver 5 million cf/day. So, let's say the spot price for gas is 1.00/thousand cf. Then 400bcf is worth $400 million. Multiply by 1/8 ??? = $50 million present value. Divide by 20 million shares = $2.50US/share contribution value for this one well. Oil contributions could be calculated the same way.
If you or someone else knows whether this is a valid valuation method, please comment. If not, what is the 'standard' method. One thing that seems to be left out is the daily delivery rate, 5 million cf/day in this example. Somehow this must be important. I have talked to oil / gas engineers, and they always want much more info before they are willing to make valuations -- like history of other wells in the area, permeabilities, water saturation, etc. etc. etc. Obviously, such factors as average life of other wells in the area would be useful, IF AVAILABLE. Problem is for us investors trying to value potential from wells in new areas or new zones, little or none of this is known. So what to do?
Any help would be appreciated. Sorry to go on so long here, but I think this might be a valuable discussion to have. |
