• The NAV approach is based on the theory that the value of the E&P company is based on the cash flows stemming from its existing assets, net of liabilities.
• Existing proved reserves are blown-down (reduced to zero) as they get produced over a certain future period.
• Proved oil and natural gas reserves
• Crude oil and gas price assumptions
• Discount rate
• Future production profile
• Royalties and taxes
• Production costs
• Future development costs
• Future abandonment and dismantlement costs
Net asset value (NAV) in theory
Major considerations/assumptions in NAV modeling
NAV overview
Reference from SEC PV-10
section (OXY’s 2006 10-K)
Make assumptions for:
• % of total development costs per year
• Annual oil production decline
• Annual natural gas production decline
NAV modeling
Reference the following from the core model:
• 2006 year-end crude oil reserves
• 2007-2013 oil production
• 2007-2013 oil price
Apply crude oil production decline assumptions to forecast oil production beyond the
projection period
Input crude oil price assumptions beyond the projection period
NAV modeling
Reference the following from the core model:
• 2006 year-end natural gas reserves
• 2007-2013 natural gas production
• 2007-2013 natural gas price
Apply natural gas production decline assumptions to forecast natural gas production
beyond the projection period
Input natural gas price assumptions beyond the projection period
NAV modeling
Calculate oil revenues (oil price x oil production)
Calculate natural gas revenues (natural gas price x natural gas production)
Calculate total revenues
NAV modeling
• Reference production costs per boe through 2013 from the core model
• Input production cost assumptions beyond the projection period
• Calculate development costs based on development costs per year assumptions inputted
earlier
NAV modeling
• Calculate total pre-tax cash flows (revenues – production costs – development costs)
• Reference tax rate through 2013 from the core model and input tax rate assumptions
beyond the projection period
• Calculate after-tax cash flows
NAV modeling
• Input assumptions for undeveloped acreage valuation and calculate total value of the E&P
segment
NAV modeling
• Reference 2007 chemicals segment EBITDA from the core model
• Input EV/EBITDA multiple (derived from comps analysis)
• Calculate the value of the chemicals segment
• Calculate Oxy’s implied enterprise value
NAV modeling