RE: Scoping Document Valuation!!6 Oct 2018 15:48
@StarBright
At a 7% discount rate, the production has an NPV of £260.1m giving an SP of 4.60p
I think that 7% is too low, and propose 10% as a more realistic rate due to the risks involved.
At a 10% discount rate, the production has an NPV of £224.9m giving an SP of 3.97p
As these figures are multiples of the current SP, this valuation is broadly supportive of the investment case.
Penguins - I don't think that further tinkering with the production schedule (tapering of tanker trips etc) adds great value at this point. Neither will the eventual CPR provide any useful input on macro factors - oil prices, exchange rates etc. Beyond these there are so many implicit assumptions in any case.
Valuation models like this one - and the EBITDA multiple methodology that I prefer - are useful only as a rough guide. They are informative as to orders of magnitude only. In this instance the main conclusion should be that the various posters on this board talking about 75p, £1 parties etc are way way outside the boundaries of what can be supported by even optimistic assumptions.
TLDR: HH production as envisaged by the scoping document supports a share price between 4p and 5p.
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Realistic basic valuation approach, however the actual share price at the point two or three wells are producing at Horse Hill will be much more impacted by:
1) wildly bullish sentiment, the glass will be 1/2 FULL for all but the swampies out there. As seen endlessly, this alone may drive a calculated value based on current NPY of say 4.5 to 28.5. Just on BB excitement we hit an adjusted 7p on todays share flotation, and that was pure sentiment.
2) SS has made clear and begun plans for multiple other drills, two selected north of BB and plans/site leases progressing currently. Also revisiting BB, all next year. With 100% ownership, once one of these three prospects is declared commercial the base NPV number above goes up, and the sentiment multiplier, well see HUR or TSLA for recent examples, 25x current calculated NPV very easy to imagine.
3) Add in a wee bit of declared > 3% ownership from investment funds, hedge funds, or of course any viable medium size to super major oil company.
So in conclusion while NPV of future cash flows forms the basics of any financial valuation calculation, it is in fact far more useful for valuation of the sale or purchase of an established play or individual mature well, Most of the actual valuation of UKOG in October 2019 will be based items 1 - 3 above.
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