Valuation Review
May 10, 2013
Oil & Gas Company Valuation
Primary Valuation Methodology
Secondary Valuation Methodology
Discounted Cash Flows: Net Asset Value
(applicable for all assets)
Price / Cash Flow Multiple
Enterprise Value / Resource Multiple
(most applicable for pre-production assets)
Price / Earnings Multiple
Enterprise Value / EBITDA Multiple
Enterprise Value / Production Multiple
Discountedcash
cashflow
flowanalysis
analysisused
usedfor
forall
alloil
oiland
sands
Discounted
gasvaluation
valuationprojects
projects
Primary Valuation Methodologies
Most net asset values (NAVs) are calculated by taking the present value (using an appropriate discount
rate) of after-tax cash flows and adjusting balance sheet items such as other assets and hedges, and
deducting reported net debt
Financial forecast developed based on existing reserves plus a reasonable expectation of reserve additions
Discounted
Cash
Flows
(NAV)
Discount rates of 7% to 10% typically employed depending on operational, development and geopolitical risk
A risk factor (0-100%) can be applied to the net present value to reflect the projects chance of success using
parameters such as the geological and geophysical interpretation
NAV also includes other assets and liabilities
Other assets can include cash and early-stage development assets (which cannot be valued on a DCF basis)
Liabilities can include debt, environmental obligations and other off balance sheet liabilities
NAV approach is the preferred methodology to value long-term projects
Market-observed NAV trading multiple reflects operational and financial risks from an investors perspective
Attempts to measure the value of barrels still in the ground
Although ubiquitous, EV / Resource multiple does not account for key considerations such as timing of
production, cash costs, capex, etc. which are all essential value drivers
Enterprise Value /
Resources
Considerable judgment must be applied
This metric is often used to value early-stage exploration assets / companies and/or as a crude value
benchmark in preliminary analyses
Primary metric used to benchmark pre-production oil sands and shale play transactions where resources estimates are
available
Secondary Valuation Methodologies
Price / Cash Flow multiple is more important for established, producing companies
However, Price / Cash Flow focuses on near-term performance only
Price / Cash
Flow
Trading multiple to Cash Flow reflects a number of cash flow characteristics
Sustainability, growth, risk, capital efficiency, etc.
This methodology does not explicitly account for the value of development assets as they do not provide near-term
cash flow
NAV methodology explicitly accounts for the value of these assets
EV / EBITDA is similar to Price / Cash Flow but is capital structure neutral and does not reflect the differing tax
status of companies
Enterprise
Value / EBITDA
Important metric for companies that have large cash or debt balances
Must use caution when comparing companies across differing tax jurisdictions
Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term EBITDA
Price / Earnings
Price / Earning multiple is more important for large, diversified companies that are valued as a whole (as opposed
to asset-by-asset)
Similar to Price / Cash Flow but generally viewed as inferior from a valuation perspective because it reflects
accounting impacts rather than cash flow impacts
Includes DD&A and other non-cash items which do not reflect underlying cash flow generation ability of assets
Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term Earnings
EV / Production multiple is more important for established, producing companies with reasonably long-lived assets
Enterprise
Value /
Production
Benchmarks how expensive the company is with respect to current production
Must use caution when comparing companies with different future production profiles and per-barrel profitability
Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term Earnings
Other Valuation Considerations
Commodity Price
and Exchange Rate
Assumptions
Stage of
Development
Reserve / Resource
Quality
Recovery
Technology
The forward looking commodity price and exchange rate assumptions employed by a particular acquirer are
important drivers in establishing value
Trading multiples reflect the inherent risk associated with exploration, permitting, development, and the
transition to full-scale production
Companies with higher-quality reserves / resources are more likely to trade at premium multiples due to their
ability to produce at lower cash costs and to survive throughout the commodity price cycle
Reservoir quality drives capex and opex and therefore project economics
Matching the right extraction tool with the right reservoir
Certain combinations are more economic than others
Growth /
Upside
Potential
Companies with strong growth profiles are often awarded premium multiples
Exploration potential (above existing reserves and resources) attracts premium valuations
Scalable assets are also afforded higher multiples
Financing
Risk
A company exposed to significant financing risk (e.g., for development capex) will typically trade at a discount
to peers that are fully-financed or more likely to receive funding
Management
Experience /
Expertise
Companies with proven management / executive teams attract higher valuations on the basis of past track
records
Credible operating teams attract significant value in the currently competitive market for talent
Oil Sands SAGD Example
z
In the following pages we undertake a simplified example valuing of a pure-play oil sands company
operates in Canadian oil sands
single asset company
SAGD project in the Athabasca fairway representing generic project parameters
average annual production and cash costs as compared to current views of costs
In a bidding scenario, the purpose of completing the valuation analysis as contemplated in these slides is to establish a market value
bid price
this does not reflect acquirers views on several factors which may affect the acquirers ability to pay including:
commodity prices and other forecasts
synergies (e.g., operating, tax, economies of scale, etc.)
upside
Oil Sands Asset Market Value Over Time
Typical Life Cycle of an Oil Sands Company
Resource
Estimate
Engineering
Regulatory
Approval
Development /
Construction
Ramp Up
Production
Value
Exploration
Key Value Drivers
Time
z
Drilling success /
excitement
Prospectivity /
scale of land
package
Resource scale &
quality
Degree of
delineation
Reservoir properties
and mapping
z
z
z
z
z
z
Environmental studies
Regulatory application
Build out of team
Facilities design
Project economics
Ability to book reserves
z
z
z
Execution within budgets & timelines
Continued build out of team
Expansion and optimization plans /
studies
Resource expansion / upgrades
Performance vs.
expectations
Efficient / effective
logistics
Macro Factors (Commodity Price, FX Rates, Inflation, Taxes/Royalties)
Early stage excitement is followed by a recognition of development realities;
successful progression to production provides value step change
6
Operational
performance
Next leg of growth
Oil Sands Project Illustrative Economics
(30,000 bbl/d SAGD) (1)
Production
Cash Flow After-Tax
Annual Cash Flow and Capex (C$ mm)
30,000
25,000
20,000
15,000
10,000
5,000
0
2013
2016
2019
2022
2025
2028
2031
2034
2037
$600
$6,000
$300
$3,000
$0
$0
($3,000)
($300)
($600)
AT IRR
($900)
2013
2040
2016
2019
2022
2025
AT NPV10
(C$ mm)
$869
AT NPV10
(C$/bbl)
$2.90
2028
2031
2034
($6,000)
19%
(%)
2037
Cumulative Free Cash Flow (C$ mm)
Bitumen Production (bbl/d)
35,000
($9,000)
2040
1. Sample 30,000 bbl/d SAGD project with 300 mmbbl of recoverable resource in the Athabasca region and a 3.0x SOR. GLJ January 2013 Price deck, $40,000/bbl/d initial capital intensity and $9/bbl non-energy opex (2%/year inflation).
Cumulative Operating Netback
(C$/bbl)
Project Netbacks (C$/bbl)
NPV Sensitivity (100%)
$100.00
Assumption
$15.79 $2.04
$80.00
After-Tax NPV Sensitivity (C$ mm)
$1.80
$89.65
$70.02
After-Tax NPV: C$869 mm
$10.08
$11.70
$60.00
$40.00
Sensitivity
Discount Rate
+/- 2.00%
WTI
+/- 10.00%
Exchange Rate
+/- 5.00%
Light-Heavy Differential
+/- 10.00%
Initial Capex
+/- 10.00%
Phase 1 Delay
- 2 years
Non-Energy Operating Costs
+/- 10.00%
Energy Operating Costs
+/- 10.00%
$14.55
$58.32
$20.00
$33.69
$0.00
Note: Cash flow and netbacks on real basis; netbacks over the life of the project
2. Bitumen value at site is calculated as bitumen blend value less cost of condensate at site.
$566
$1,283
$611
$1,120
$748
$1,002
$753
$792
$742
$822
$840
$985
$946
$869
$916
$898
Oil Sands Company Trading Metrics
Primary Valuation Methodology
Price / Street NAV (x)
1.0x
Integrated
EV / Resources (C$/bbl)
$3.50
Pure Play
0.9x
Integrated
0.9x
$3.00
0.8x
$2.89
0.8x
0.8x
Pure Play
$3.29
0.9x
$2.60
0.8x
$2.37
0.7x
$2.50
0.7x
$2.17
0.6x
$2.08
0.6x
$2.00
0.5x
0.5x
$1.50
$1.27
0.4x
0.3x
0.3x
0.3x
$1.01
$1.00
$0.83
0.2x
$0.50
0.1x
$0.20
$0.00
0.0x
D
C
F
Company
A
F
Company
Producing projects command a P / NAV premium over projects under development
Oil Sands Company Trading Metrics
Secondary Valuation Methodology
Price / Cash Flow (x)
12.0x
Integrated
8.0x
18.0x
Pure Play
9.8x
10.0x
Price / Earnings (x)
5.8x
4.8x
Pure Play
9.9x
10.7x
14.0x
12.0x
7.3x
6.0x
14.8x
15.0x
9.5x
7.5x
6.1x
Integrated
14.9x
9.8x
9.0x
4.7x
4.0x
6.0x
nmf
nmf
2.0x
3.0x
0.0x
0.0x
B
C
I
Company
EV / EBITDA (x)
30.0x
Integrated
B
F
Company
EV / Production (C$000s/boe/d)
$420
Pure Play
Integrated
Pure Play
$362
25.8x
25.0x
$350
20.0x
$280
$236
$210
15.0x
10.0x
9.2x
7.0x
5.8x
5.0x
$140
6.6x
5.4x
5.4x
6.5x
$167
$133
$98
nmf
4.4x
$96
$108
$94
$75
$63
$70
$0
0.0x
B
A
G
Company
C
H
Company
Oil Sands Sector Trading Performance
Oil Sands P / Street NAV Multiples (2011 to Date) (1)
Relative Trading Performance (2011 to Date)
150.0
Senior Oil Sands Index
S&P 500
TSX Oil & Gas Index
WTI
Senior Oil Sands
140.0
Long Run Average (Since 2003)
1.20x
128.4
130.0
1.10x
120.0
1.00x
Long Run
Average = 0.93x
0.90x
110.0
104.6
0.80x
100.0
0.70x
Current =
0.76x
90.0
0.60x
85.7
80.0
US$120/bbl
0.50x
70.0
Spot
WTI
0.40x
68.4
60.0
US$60/bbl
0.30x
0.20x
Jan-11 Apr-11
50.0
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Jul-11
Oct-11 Jan-12 Apr-12
Jul-12
Source: FactSet
Note: Senior Oil Sands Index is an equally weighted index, including COS, CVE, CNQ, IMO, MEG and SU; Senior Oil Sands Index within the relative trading performance chart excludes COS and MEG
1. Based on BMO Capital Markets Equity Research estimates.
P / NAV multiples are below the long-term average;
Strong correlation between oil price and share price movements
10
Oct-12 Jan-13 Apr-13
Oil Sands Transactions Metrics
In Situ Transactions > $300 mm
$2.50
$3.97
Producing Average:
$1.72/bbl
$2.00
$1.71
Pre-Production Average:
$0.98/bbl
$1.50
$1.24
$1.08
$1.02
$1.07
$1.00
$0.91
$1.00
$0.81
$0.81
$0.81
$0.79
$0.46
$0.50
-Shell / BlackRock ConocoPhillips /
EnCana
Transaction Date
Transaction Size (C$ m m)
WTI (US$/bbl)
Nexen / OPTI
CNOOC / OPTI KNOC / Newmont
Statoil / NA Oil
Sands
BP / Husky
PetroChina /
AOSC(1)
CIC / Penn West - CNRL / Enerplus - PTTEP / Statoil Devon / BP - Kirby
BP / Value
Seal
Kirby*
Kai Kos Dehseh
Assets
Creation - TDG
40%(2)*
Interest*
May-06
Oct-06
Dec-08
Jul-11
Jul-06
Apr-07
Dec-07
Aug-09
Mar-10
Mar-10
May-10
Sep-10
Nov-10
$2,400
$3,692
$735
$1,973
$310
$2,208
$1,304
$3,950
$668
$919
$817
$405
$2,124
$71
$60
$40
$98
$75
$66
$87
$70
$82
$80
$74
$74
$82
Note: Recoverable Resource defined as 2P Reserves + best estimate of contingent resource where disclosure available; * denotes transactions that include only 2P + contingent resource
1. $1.9 bn initial deal at $0.63/bbl; transaction value and multiple include the right of the option to acquire remaining 40% interest in MacKay and Dover for C$2 bn; does not include rate of attractive PetroChina financing terms.
2. Transaction value adjusted for BMO estimate of C$200 mm in CAPEX attributable to the acquired share in pilot project.
Variance in transaction values depends on stage of development of the assets and other asset-specific factors;
$/bbl metrics often used by buyers to assess market value for pre-production assets
11
Oil Sands Company Illustrative Value Range
Pre-Production Pure Play ($/share)
Fundamental
Analysis
DCF
Producing Pure Play ($/share)
Fundamental
Analysis
En Bloc Perspectives
P / NAV + 30%
Premium
EV / bbl
EV / bbl
Trading +
Precedent
30% Premium Transactions
DCF
En Bloc Perspectives
P / NAV + 40%
Premium
EV / bbl
EV / bbl
Trading +
Precedent
40% Premium Transactions
$13.55
$13.83
$12.81
$10.08
$10.75
$9.69
$6.07
$6.10
$4.12
$3.40
$9.03
$7.60
$8.25
$6.30
Selected
Metrics
Discount Rate: 0.5x - 0.8x +
10% - 8%
30% premium
$0.80/bbl $1.30/bbl +
30% premium
$5.33
Selected
Metrics
$0.80/bbl $1.70/bbl
Discount Rate: 0.6x - 0.9x +
10% - 8%
40% premium
$1.50/bbl $2.00/bbl +
40% premium
Triangulation of valuation using multiple methodologies drives better decision making
12
$5.00
$2.00/bbl $3.00/bbl
Disclaimer
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