Valuing Acquisitions Using Risk and Uncertainty
Glenn McMaster1 and Frances Morris-Jones2
1ConocoPhillips, Houston, Texas
2ConocoPhillips, London, England
As exploration for oil and gas resources becomes increasingly difficult, companies are looking to unconventional resources to replace reserves and develop new sources of production. Small independent energy companies have been first movers in acquiring much of the acreage and resources but lack sufficient capital to develop at-scale projects. As the industry matures, mergers and acquisitions play an important role in the growth of companies. But does the price paid per mmboe of certified volume truly reflect the value assigned, considering the various levels of risk and uncertainty associated with these reserves and resources?
In Australia, there have been several CBM mergers and acquisitions in recent years, driven by the need to consolidate activities, reduce costs, add reserves to the books and build enough materiality to export as LNG. The newspapers are rife with comments and assessments that “the analysts say that the offer of $1.5Bn for 3P and 2C reserves of 2 TCF implies a value of $0.75/mcf of gas, the offer is towards the high end of recent transactions...” But how are these valuations arrived at? Is the valuation consistent and comparable between acquisitions and is it mathematically correct?
The Petroleum Reserves and Resources Classification and Definitions state that when discrete estimates are made for each category of reserves and resources, that they should not be aggregated without due consideration of their associated risk. Unfortunately the analysts seem to have dropped the concept of risk from the evaluation, adding in many cases 3P and 2C and in some instances Prospective volumes all together. Should they be aggregated? Are they actually the same? Not only do these volumes carry a level of technical risk, they also have associated commercial risk. We believe that it is not enough to use a consistent classification system that reflects only the range of uncertainty: the system must also account for the risk
AAPG Search and Discovery Article #90098©2009 AAPG Education Department, Houston, Texas 9-11 September 2009