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A crude yardstick

Created:
18 March 2008
Written by:
Daniel O'Sullivan

It's not easy to put a conventional valuation on the Falklands prospectors, such as a multiple of forecast earnings or net present value, because they are at such an early stage. Indeed, between them they're yet to even sink a well. However, a 'quick and dirty' method of assessing valuation is to divide enterprise value (EV- market cap plus debt minus cash) by a so-called 'P50' estimate of the number of barrels of oil that could potentially gush out from their prospects. This tells investors what value is being put on each notional barrel of oil that an explorer may eventually produce.

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For each of the three companies with published P50 estimates the value being put on a notional barrel is just pennies (see table). On first sight, that looks measly when a real barrel of the black stuff fetches $100 plus. However, this massive discount is justified because these companies still have everything to prove in terms of turning the sub-surface structures they claim to have identified into actual oil reservoirs capable of commercial production. Moreover, there is also capital expenditure to consider.

Nevertheless, our crude yardstick shows the market rates of Desire Petroleum's prospects as between three and six times more valuable than those of either Falklands Oil & Gas or Rockhopper. The range of valuations attributed to Desire's notional barrels reflects the possibility that it's farm-in partner could take a share of anything between 0 and 50 per cent of future production. In exchange for handing over a slice of production to a farm-in partner, explorers benefit by sharing drilling risk. In the case of Falklands Oil & Gas, our EV/mboe calculation uses just 49 per cent of the 12bn barrels notionally recoverable from its prime drilling targets because BHP Billiton has a 51 per cent stake.

Ratings divergence in the sector could be down to whether a company is operating in the shallower, cheaper-to-drill North Basin or the deeper, costlier-to-drill and more storm-tossed South Basin, as well as whether the company is fully-funded and has a farm-in partner on board. Desire ticks the right boxes on all three fronts, but does this justify such a wide discount for the other players? Rockhopper is as likely to benefit as Desire from the latter securing a rig, although it has yet to structure a farm-out. Falklands Oil & Gas, however, looks a bargain, as little credit seems to be given to its operational experience, financial fire-power and the considerable weight in rig negotiations brought by partner BHP Billiton.

UK-quoted Falkland Island oil plays

Company Ticker Price (p) 13/03/08 Price gain YTD %  North/South basin Farm-in Worked-up prospects Total "P50" estimated recoverable oil (mboe) EV/attributable P50mboe (£) Funded for drilling
Borders & Southern BOR 55.5 95 South No Not stated Not stated - No
Falklands Oil & Gas FOGL 135 4 South Yes, BHP Billiton 51% 10 12,045 0.02 No
Desire Petroleum DES 73.25 193 North Yes, details undisclosed 10 2,300 0.06 / 0.12 Yes
Rockhopper Exploration RKH 84 68 North No 28 3,694 0.02 No

Sources: Bloomberg, Thomson Markets, IC and companies named

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See also 'Rigging the Falklands oil race'

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