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(1/4) Some of you may be wondering what's the impact of the shift in oil futures on asset valuations? Although E&P equities have been on a tear (
), the implied asset values have actually gone down. Let me explain in two charts using the strip change from 10/5 to 12/9.
), the implied asset values have actually gone down. Let me explain in two charts using the strip change from 10/5 to 12/9.
(2/4) PDP value has declined, as the juice from the front-end has not outweighed the back-end destruction. Below is a chart showing an example of the change in PDP PV10 based on various base decline rates. In all cases, PDP value has declined.
(3/4) Undeveloped value has also taken a hit. The below chart shows the change in a type well IRR depending on SPUD date. Only wells drilled in the next 1-2 years have an improved IRR. For example, the IRR for a well drilled 5 years from now dropped from 33% to 27% (-6%).
(4/4) As you all know, this can change overnight, but interesting to note as E&P values explode higher. So what does this impact? For one, it may negatively impact the bid/ask spread on asset deal negotiations. Disclaimer: I am not short any E&P names.
