Valuing energy companies is no easy task. Not all barrels being produced are created equal, every company has a slightly different asset mix and not every company is equally good at drilling and producing wells.
The best way that I know how to try and value these complicated beasts is by taking my valuation signals from arm's length transactions between profit motivated parties.
There have been two pretty major asset sales in the Permian basin in recent months. I thought it would be useful to have a look at those transactions and try and get a handle on what the going rate is for Permian Basin assets.
Purchase Price - $768 million
Production - 3,300 barrels per day (73% oil)
Price Per Flowing barrel - $768 million / 3,300 = $232,727
Drilling locations - 800
Price Per Drilling Location - $768 million / 800 = $960,000
Acres - 53,306
Price Per Acre - $768 million / 53,306 = $14,407
Risked Resource Potential - 145 million barrels (67% oil)
Price Per Barrel of Risked Resource - $768 million / 145 million = $5.29
The data used above comes from the company press release on the transaction linked earlier, and the presentation slide included below.
Reason For Transaction - "This oil-targeted acquisition is an important next step in Rosetta's strategy to pursue new growth opportunities and build our inventory of long-lived, oil-rich resource projects. These assets complement our Eagle Ford properties and are a good fit with the experience and technical knowledge of our operations team," said Jim Craddock, chairman, CEO and president. "This transaction provides entry into the prolific Permian Basin with both existing production and strong growth potential in proven delineated areas as well as prospective exploration targets on undeveloped acreage. The addition of new capital project inventory provides competitive options as we prepare to deploy the free cash flow generated by our Eagle Ford assets."
Sale Price - $2.6 billion
Production - 24,500 barrels per day (67% oil)
Price Per Flowing barrel - $2.6 billion / 24,500 = $106,122
Drilling locations - 7,600
Price Per Drilling Location - $2.6 billion / 7,600 = $342,105
Acres - 225,000
Price Per Acre - $2.6 billion / 225,000 = $11,555
Risked Resource Potential - 538 million barrels (67% oil)
Price Per Barrel of Risked Resource - $2.6 billion / 538 million = $4.83
The data used above comes from the company press release on the transaction linked earlier, and the presentation slides included below.
Reason for the Transaction - Tom Ward, SandRidge's Chairman and CEO, commented, "This is a great outcome for our shareholders. The sale of the Permian assets at this time has allowed us to capitalize on current strong valuations for mature, conventional Permian assets and generate a very strong return on our investment there."
Noting that the Permian Basin assets were a key part of SandRidge's planned strategic transition from a natural gas producer to an oil rich E&P company, Ward added, "With these proceeds we will have a cash balance of almost $3 billion and liquidity of over $3.5 billion, which we intend to use to reduce debt and strengthen the balance sheet. This will also allow us to fund development of our acreage position as well as future opportunities in the highly scalable, high return Mississippian Play."
Observations When Comparing the Two Deals
Price Per Flowing Barrel
Price Per Drilling Location
Price Per Acre
Risked Resource Potential
Price Per Barrel of Resource
The table above puts the two deals side by side. The Sandridge property has been developed further which is why the price per flowing barrel differs between the two.
The two metrics that we can best focus in on are the price per acre and the price per barrel of resource that the companies expect will ultimately be recovered.
That provides us with a range in value per acre of $11,556 to $14,407 and per barrel of recoverable resource of $4.83 to $5.30.
Those are two data points that will come in handy when trying to do initial valuation work on other Permian basin assets.