RE: Weald company valuations30 Oct 2018 15:01
EyesOnThePrize, Mr Vonk and I have applied the same EV/EBITDA methodology - it is standard practice if you like - but Mr Vonk has used a multiple that is outside industry comparables! He is wrong, for whatever reason, and I am right...
However the EV/EBITDA methodology is not only revenue based as your post states, as it explicitly includes production related costs. It is essentially a quick and dirty way of valuing the free cashflow that can be derived from projects like HH. Free cash really is king: it allows companies to pay the dividends that ultimately attract and retain true institutional investors, and it affords them the opportunity to invest in further sites/wells etc. The biggest problem with EV/EBITDA in this case is that the company evidently anticipates material depletion. EV/EBITDA is more reliable and appropriate where stable production and therefore stable free cashflows are expected. Remember the tanker schedule set out in the scoping report goes from 16/day during the first 4 months, to 8/day after 3 years and eventually to just 2/day for the last 11 years of the 20 yr production period. I believe that a depletion profile this steep is consistent with HH being considered a "tight play".
So, more complex modelling is necessary. The usual way to do this is to model year-by-year the cashflows generated by the project, and then to discount these so as to calculate a net present value. The scoping document gave us quite a lot of useful information, enough to build such a DCF model populated with supportable assumptions in key areas. There are still gaps in the data however - notably around CAPEX and OPEX. As further information is made public through RNS and CPR etc these gaps will be filled allowing modelling confidence to grow. The biggest problem with DCF models is usually choosing the appropriate discount rate, but it is apparently normal O&G industry practice to use 10%. When you see references to the NPV10 valuation of HH (or other projects) you are seeing the output of a DCF model with a 10% discount rate. I can make a good argument that 10% might not be the appropriate rate, but that is (a) perhaps irrelevant if it's an industry standard and (b) probably too arcane a topic for a bulletin board.
Your point on reserves is interesting. To confer a full valuation, investors will want to be confident that the proven reserves support the level of production targeted for the licence period. Beyond this however they are perhaps not as important as might be expected, especially where licences are granted for finite periods - apparently 20 years here. Excess reserves over targeted production are of relatively limited economic value to the licence holder. Of course licence extensions are possible, but if NPV10 is being used then any cashflows >20yrs out are in any case heavily discounted - £1 in year 21 is worth only 11p today.
My view is that institutional investors will remain focussed on understanding free cashflow gen
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